While the president's debt forgiveness plan was struck down in court, calls to forgive student loan debt will continue to be part of the broader policy and political debate. In addition to increasing the national debt and potentially worsening inflation. The same paycheck covers less goods, services, and bills.
While there are few direct estimates of the effect of debt cancelation in the literature, estimates based on the relationship between wealth and consumption suggest that this forgiveness could increase consumption by several billions of dollars each year in the next five to ten years.
The government currently borrows more to fund new student loans than it receives in payments from existing loans due to a slowing of repayments — that net amount adds to the national debt. In order to make required payments on existing student debt the federal government borrows from the public, i.e. taxpayers.
Right now, anyone who receives student loan forgiveness between 2021 and 2025 will not have to pay taxes on any amount of student debt forgiveness. PSLF or IDR forgiveness is a potential result for any borrower. However, not all borrowers will reach forgiveness.
In certain situations, you can have your federal student loans forgiven, canceled, or discharged. That means you won't have to pay back some or all of your loan(s). The terms “forgiveness,” “cancellation,” and “discharge” mean essentially the same thing.
If the debt forgiveness program is permitted to move forward, at a time when consumer spending already is high, it could lead to more inflation, Jones said.
Education originally estimated these loans to generate $114 billion in income for the government. Although actual costs cannot be known until the end of the loan terms, as of fiscal year 2021 these loans are estimated to cost the federal government $197 billion.
Other research suggests that student loan repayments slow consumer spending, inhibit saving for retirement, and lower access to future credit due to higher delinquency rates.
Student loan debt can prevent you from making major purchases like a home or a car. An economy may see fewer new businesses when there is more student loan debt. Student loan debt also limits consumer spending. Economic recovery can be more difficult when there are many people carrying student loan debt.
When debt burdens are lifted, student borrowers can start new businesses and in turn, create job opportunities for others. They can buy homes for the first time in their lives, pay down other debts such as their credit card bills, and have less reliance on social safety net programs.
Student Debt vs Income by Age Groups
Among the age groups, adults between the ages of 18 and 29 are the most likely to have student loan debt. Meanwhile, adults between the ages of 35 and 49 years old on average owe the most student loan debt.
Student loan debt slows new business growth and limits consumer spending. Broad student loan debt forgiveness may help boost the national economy by making it more affordable for borrowers to participate in it.
Myth: Student loan forgiveness is the fair way to help Americans escape massive amounts of debt. Fact: Borrowers signed on the dotted line for their loans. Erasing these loans does not teach borrowers to manage their debts. Moreover, the cancelation is an insult to those who diligently paid off their loans.
Generally, if you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
In most cases, your child's school will give you your loan money by crediting it to your child's school account to pay tuition, fees, room, board, and other authorized charges. If there is money left over, the school will pay it to you.
Most student loans — about 92.4% — are owned by the government. Total federal student loan borrowers: 42.7 million. Total outstanding federal student loan debt: $1.64 trillion.
Sixteen percent of Americans with student loans are behind on their payments, putting them at risk of accumulating interest and lowering their credit scores. Those with lower incomes and less education are more likely to be behind on their payments. Source: Federal Reserve (2024). Source: Federal Reserve (2024).
"And if you assume there's a likelihood it's canceled, you're going to be more likely to take out more debt up front. That's going to give colleges more pricing power to raise tuition without pressure and to offer more low-value degrees."
Research has shown that cancellation would boost GDP by billions of dollars and add up to 1.5 million new jobs, reducing the unemployment rate. 5 Workers who are Black, Latinx, immigrants, women, and those in industries paying low wages are still facing a terrible economic situation with high levels of unemployment.
Individuals who receive debt forgiveness would have more disposable income to afford basic necessities, purchase homes or even start their own businesses. However, debt forgiveness could encourage future students to take on more debt or encourage some universities to charge more for tuition, Jones said.
Student loans disappear from credit reports 7.5 years from the date they are paid in full, charged-off, or entered default. However, education debt can reappear if you dig out of default with consolidation or loan rehabilitation. Student loans can have an outsized impact on your credit score.
Another concern of forgiving student debt is “moral hazard,” the idea that students might make riskier choices if they think their debt will end up being forgiven, Jones said.