Recent discussions and events have elevated the profile of student loan debt forgiveness — a development followed intently by the 45 million American borrowers who collectively owe $1.7 trillion in student loans.
During the 2020 presidential campaign and beyond, proposals around student loan debt have been all over the map: full debt cancellation, up to $50,000 forgiven for borrowers who meet certain criteria, $10,000 as part of an economic stimulus plan. President Joe Biden recently said he would not take any steps to pursue $50,000 in forgiveness through executive order, but left the door open to a lower amount and asked Congress to act through legislation.
Amid all the talk and speculation, it’s worth asking: Who holds all that student debt? Where does student loan forgiveness stand at this point? And what are the economic implications of debt forgiveness?
First, who’s doing all that borrowing? According to Experian, as of 2019, about 14% of American adults had student debt. A study by Investopedia show that as of 2020, the outstanding loan debt in the United States was $1.57 trillion. With over 54% of college attendees taking on some sort of debt — including student loans — to pay for their education, the average amount of a student loan was more than $37,500 per student. People between the ages of 25 and 34 had approximately $500 billion in student debt, while those between 35 to 49 had balances totaling $602 billion. Student loans were still relatively significant in the next age group, with those between 50 and 61 owing about $262 billion in student loans.
Graduate school borrowers make up just a quarter of the individuals taking out loans, but are responsible for about half of all debt. Because the government limits federal borrowing for undergraduate school, so many of those with staggering six-figure loan totals have borrowed for graduate school. Borrowing for for-profit schools increased significantly after the Great Recession.
All the accumulated student loan debt does have its impact. According to data released by the U.S. Department of Education in October 2017, about 27% of people who entered college in the 2003–2004 academic year have defaulted on their loans. Judith Scott-Clayton, an associate professor of economics and education at Columbia University predicts that given the current pace, approximately 38% of borrowers in that age bracket will default by 2023. Additionally, the Federal Reserve reports that adults with student loan debt are less likely to say they were doing okay financially or on-track for retirement savings versus peers without the debt. A study by the National Center for Education Statistics suggested that about 64% of people who default on student loans owe less than $10,000.
Some, including Moody’s Investor Service, predicts that wiping out student debt would be comparable to tax cuts in the near term. Over the longer term, it could increase homeownership and boost the creation of small businesses. One study from Bard College’s Levy Economics Institute goes even further by saying that outright debt cancellation could boost real GDP by almost $100 billion per year.
However, not everyone is on-board with the economic benefits of debt forgiveness. The arguments against loan relief include: It is unfair to many millions of individuals who have paid their loans or never borrowed in the first place; loan forgiveness benefits wealthy, high-earning professionals with big loan amounts; and the plan is prohibitively expensive — the estimated price tag for $10,000 is $400 billion.
Any wide-ranging loan forgiveness is far from a done deal, but the recently passed American Rescue Plan does suggest something about where things may be headed.
The stimulus plan includes The Student Loan Tax Relief Act, which exempts student loan debt forgiveness from federal taxes through 2025. The change would affect borrowers who participate in existing income-driven repayment and debt forgiveness plans, which have been subject to federal taxes in the past. It could also apply to future debt forgiveness programs.
As you serve clients who may have benefited from student loan forgiveness under the American Rescue Plan or are balancing student debt with other financial goals, FundVisualizer provides a variety of tools to help you research and create diversified portfolios.
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