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Where Things Stand With Student Loan Debt, the Possibility of Forgiveness, and the Economy

By Owen Daugherty, NASFAA Staff Reporter

When the most recent extension of the pause on student loan payments was announced in December — pushing the amount of time borrowers will have been without payments to more than two years — a pair of factors were cited by the Biden administration: another coronavirus surge due to the Delta variant, and giving borrowers more time to prepare.

The second factor was a bit head-scratching as the administration touted a rebounding economy and one of the strongest job markets in history. 

Now, with payments set to resume in less than two months and the economic recovery holding strong, the administration is at a crossroads as advocacy groups continue to push for some form of student loan forgiveness — or at least another extension of the payment pause — and little is publicly known about the Department of Education’s (ED) effort to raise awareness surrounding the resumption of payments. 

Further complicating the prospects of debt forgiveness is the desire among policymakers to address the underlying issues in how students finance their postsecondary education that leads to huge debt loads.

The White House seems to be recognizing as much, with Chief of Staff Ron Klain saying last week that the student loan repayment system will need to be significantly overhauled before borrowers are expected to resume repayments.

“The president is going to look at what we should do on student debt before the pause expires, or he’ll extend the pause,” Klain said.

While advocates and progressive lawmakers have increased their calls for the administration to cancel student loan debt before the payment pause ends May 1, a new analysis from the Committee for a Responsible Federal Budget (CRFB) predicts doing so would further add to an already high inflation rate.

CRFB posits that the widespread forgiveness would lead to higher consumption, and considering that the economy is currently unable to meet existing demand due to increased disposable income and lingering supply constraints, among other factors, further increased demand could result in higher prices rather than higher economic output.

“The effect on output would be very small. We think it would have very little positive effect on economic output,” said Marc Goldwein, senior policy director at CRFB. “Not none, but very little, because the economy is already so saturated.”

Notably, CRFB’s analysis assumes all federally-held student loans would be forgiven, wiping roughly $1.6 trillion off the balance sheet. President Joe Biden has said he does not support forgiving more than $10,000 in loans per borrower. 

Goldwein said the economic impact of canceling student loans is different from that of pausing payments.

“With the pause you wouldn't have the wealth effect, and in fact, it would go slightly in the other direction, because you would know some of the principal you still owe,” he said. “The pause would not be as inflationary as full forgiveness.”

Others have pushed back on CRFB’s projections, pointing to past work from the group that found student loan forgiveness would do little to stimulate the economy, arguing both can’t be true at the same time. 

Marshall Steinbaum, a senior fellow in higher education finance at the Jain Family Institute and an assistant professor of economics at the University of Utah, said critics of student debt cancellation have shifted the terms in which they criticize it. 

Steinbaum argues that previously, those that cited economic factors to oppose debt cancellation said it wouldn’t stimulate the economy because borrowers would save the money instead of spend it. Now, with the economy humming along, they portend that debt cancellation would cause inflation because people are spending too much money, and too much money chasing too few goods means the price of those goods goes up.

Still, Republicans on the House Committee on Education and Labor used CRFB’s latest findings to push back against student loan forgiveness.

“Blanket student loan forgiveness would crush the American economy,” read a post from the Twitter account of the committee Republicans.

Klain’s recent comments underscore a notion Steinbaum pointed out: the impact of student loan forgiveness on the economy is no longer being debated as much as it is now being weighed through a political lense. 

To justify loan cancellation, the White House “could have said there were tons of layoffs during the recession and we wanted to make sure that even if people got laid off, they wouldn't be economically eviscerated,” Steinbaum said. “Now they could say the economy is good, wage growth is strong, most people have jobs, and employment rates are back down to where they were before the coronavirus and recession.”

“In some sense, that would be the more logical outcome from everything else the White House is saying about the economy,” Steinbaum added. “But it seems like they're not doing that because they’ve correctly read that the politics of debt cancellation has changed, including their apprehension that they haven't gotten the Build Back Better Act through — and this is a constituency that's very important to them.”

To Steinbaum’s point, the unraveling of big portions of Biden’s higher education agenda could explain some of the momentum behind the student loan cancellation movement. WIth the Build Back Better Act stalling, free community college falling out of the package months ago, and Biden’s pledges to significantly boost if not double the federal Pell Grant also hitting roadblocks, student loan cancellation could be seen as one of the few things Biden can do on his own without having to go through Congress, though that authority is being fiercely debated.  

Charlie Eaton, an assistant professor of sociology at the University of California, Merced, said he sees a shift in how the general public is starting to view the benefits of widespread debt cancellation, adding that it is no longer being framed as an “either/or” choice.

“Especially when we take a political view of student debt and social programs, deciding to cancel debt is not a choice to spend less money on something else,” he said. “There's not a lot of evidence that doing that will then mean we don't have the political will or the fiscal capacity to also expand Pell Grants or also spend more on Medicare.”

Further, both Eaton and Steinbaum pointed to a robust economy without student loan payments for the past year, driving home the point that the economy, inflation, and the federal government’s balance sheet will be more or less the same with or without student loan forgiveness.

With less than 60 days before payments are set to resume barring another extension, advocacy groups feel the time is now. More than 200 groups issued a letter this week to Biden calling on the administration to act before payments resume by both fixing “the broken student loan system” and canceling some amount of federal student debt.

“Your administration has the opportunity to continue repairing the damage caused by policy failures at the federal and state level and decades of government mismanagement and industry abuses — an opportunity and an obligation that must be fulfilled before any action is taken to resume monthly student loan payments,” the groups wrote to Biden.

 

Publication Date: 3/10/2022


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