What happens if all $1.6 trillion of student loan debt is forgiven?
Here’s what you need to know.
Student Loan Forgiveness
Senator Bernie Sanders (I-VT), a 2020 presidential candidate, wants to forgive all $1.6 trillion of outstanding student loans, including both federal and private student loan debt. Sanders’ student loan forgiveness plan has no eligibility requirements; all 45 million student loan borrowers are eligible for student loan discharge.
Sanders will fund his student loan forgiveness plan through a new tax on financial transactions, which he expects could raise more than $2 trillion over the next 10 years. The tax plan will include a 0.5% fee on all stock trades, a 0.1% fee on all bond trades and a 0.005% fee on all derivatives trades.
Similarly, Senator Elizabeth Warren (D-MA), also a 2020 presidential candidate, introduced legislation earlier this year to cancel student loan debt for more than 95% of borrowers, and would entirely cancel student loan debt for more than 75% of Americans with student loan debt. Principally, Warren would cancel $50,000 in student loan debt for every person with household income under $100,000 and cancel substantial debt for every person with household income between $100,000 and $250,000. Like Sanders, Warren would fund student loan forgiveness through new taxes. Both candidates would not assess income tax on any student loan debt that is cancelled.
So, what would happen if all – or even most – of the $1.6 trillion of student loan debt is cancelled?
Cancel Student Loans: The Potential Impact
Sanders and Warren believe that among other benefits, universal student loan forgiveness would reduce the wealth gap in America, provide an economic stimulus to the middle class, increase home purchases, help start small businesses, and enable young people to start a family without a significant debt burden.
Moody’s assessed the economic impact and found that student loan debt cancellation would result in:
- A modest increase in household consumption and investment;
- An improvement in small business and household formation; and
- Increased home ownership in the long-term.
However, Moody’s also found the economic impact would be relatively minimal, similar to a “tax-cut-like stimulus to economic activity” in the near-term. The report also found, among other impacts, the potential for:
- Increased moral hazard: For example, future student borrowers could be incentivized to borrow more student loan debt knowing that their debt will be forgiven.
- More student loan debt: Future student loan borrowers may borrow more student loan debt, but their student loan debt may not be forgiven, leaving them with potentially higher leverage.
- Lost Revenue: Since about 90% of student loan debt is federal student loans, the federal government would lose about $85 billion, or 0.4% of GDP, in forfeited student loan principal, interest and fees.
- Muted Impact Due To Borrower Base: The majority of beneficiaries of universal student loan cancellation are high income earners, which could limit the economic benefit.
Of course, the true economic magnitude will be based on the implementation of universal student loan debt forgiveness, the income of student loan borrowers, how much student loan debt is forgiven, who ultimately pays for the student loan forgiveness, whether there are offsets to recoup lost revenue and other factors.
Your Next Action Steps
Universal student loan forgiveness is anything but a sure bet. In the meantime, make sure to understand all your options for student loan repayment.
Start with these four pillars:
- Student loan refinancing
- Student loan consolidation
- Income-driven repayment plans
- Student loan forgiveness
This student loan quiz takes less than one minute to complete and provides you with a free, customized student loan repayment plan.