The Department of Education (DOE) has granted the over 40 million Americans who have Direct federal loans and PLUS loans an extra month of breathing room. The extension of forbearance, the pause in interest accrual, and the suspension of collections activity will run through January 31, 2021.
The decision should help borrowers prepare for what comes next. While President-Elect Joe Biden has not committed to any specific action on student loans, he is expected to further continue the freeze on payments and interest before considering his campaign policy education loan goals, which included: help for those undergrad borrowers who earn $25,000 or less; automatic enrollment in the income-based repayment program, with the opportunity to opt out if borrowers wished; and changes to the taxation of debt forgiveness. The Biden plan also contemplated canceling up to $10,000 in debt for students who work in national or community service.
The idea of broader student loan forgiveness always sounds like a great concept but is it? The Federal Reserve’s recent Survey of Consumer Finances (SCF) noted that the nearly $1.6 trillion of student debt continued to be the largest source, in dollar terms, of non-mortgage debt owed by American families. That fact might lead you to think: let’s get rid of it. But critics contend that doing so would favor wealthier people. The Fed survey highlighted the issue, which has become a flashpoint in the conversation: “Student debt has consistently been disproportionately held by higher-income families, which likely can support their loan payments. Indeed, in each survey, more than half of outstanding student debt belonged to the top 40% of the income distribution, and the bottom quintile never held more than 14% of the debt.”
Researchers Sylvain Catherine, of the University of Pennsylvania’s Wharton School of Business, and Constantine Yannelis, from University of Chicago Booth School of Business tried to tackle the issue in a recent working paper. They found that “forgiveness would benefit the top decile as much as the bottom three deciles combined,” and “Blacks and Hispanics would also benefit substantially less than balances suggest.” And of course, student debt forgiveness would not benefit millions of Americans who did not attend college at all
Hal Singer and Shaoul Sussman counter the argument that student debt cancellation is regressive in the American Prospect, saying that it “would reduce the burden of student debt more for lower-income indebted households. Put differently, lower-income households would get the largest relief relative to their incomes.”
A closer look at the numbers bolsters the case for capping student loan forgiveness at a lower level. The Brookings Institution found that “A very small fraction of all student loan borrowers have very large loans. Six percent of borrowers owe more than $100,000 in debt,” which represents about a third of the outstanding debt. “At the other extreme, 18% of borrowers owe less than $5,000 in student loan debt. They collectively owe 1% of the debt outstanding.”
While borrowers are likely to feel relief, is forgiveness the best way to spur economic activity? Jason Furman, a former chief economist to President Obama, isn’t so sure. He tweeted, “I see very little aggregate help from it.” Singer and Sussman don’t buy it. They cite research from the Federal Reserve Bank of New York that shows student borrowers refrain from purchasing homes or autos as a result of their debt burdens. Without the anvil of debt hanging over them, they might be able to more fully participate in the economy.
Where does that leave us? There are no simple answers, but my hope is post-COVID, the country focuses energy on how to repair the broken higher education system, root and branch, not just the loan programs associated with the degrees.
Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at askjill@jillonmoney.com. Check her website at www.jillonmoney.com.
