What is the value of this pause for individuals who are borrowers?
It depends. 18.1 million borrower borrowers – of 43.4 million of borrowers – had to make Federal student loans prior to the loan suspension.
The customers will get the benefit of a reduction in their payments through May 1 2022. The average monthly amount of $393, the total direct benefit to the 18.1 million borrowers has been more than $7.1 billion each month, or more than $85 billion in a year. This is to pay off other loans, or buy items and services.
The 25% million of borrowers that were not paying their bills prior to the loan pause – namely, those who are in the college system, recent graduates and those who are in default aren’t immediately benefited because they don’t have any extra cash to spend.
While a small percentage of borrowers aren’t directly benefitting from the payment stop because they were not paying their loans but the majority of borrowers have benefited from the cessation of the interest that accrues on federal loans for student.
With an average rate of 5.8 percent for all federal student loans outstanding that will save all 43.4 million borrowers more than $93 billion annually in interest. That’s the equivalent of $179 per month.
Can cancellation really benefit the economy?
As an economist that examines student loan debt I believe that Federal student loan cancellation could be beneficial however, relatively small, economic impact. Because most students who have federal loans aren’t making any payments until the beginning of 2020, the majority of any financial gain is already evident in the current state of GDP. They have already spent the money that could have been used for payments for other purposes. The latest payment pause will not provide them with any additional cash to spend immediately.
If Biden would decide to restart the student loan payment on May 1, it could result in a decrease in GDP since the money from those loans will no longer be able to be used on other items, such as clothing, food or leisure. However, stopping a decrease in economic activity isn’t an identical thing to expanding the economy.
In the Dec. 8, 2021 letter that was sent to three Democrats three Democrats – Senators Elizabeth Warren of Massachusetts and Chuck Schumer of New York and Rep. Ayanna Pressley of Massachusetts demanded Biden to erase all federal student loan debt through an executive decision. The letter stated that the cancellation of the entire $1.6 trillion of student loan debt in the federal government “has the potential to add $173.83 billion – in 2020 dollars – to the nation’s GDP in the first year after implementation.”
The model that was that was used to calculate “the potential to add $173.83 billion” to GDP as cited in the letter is based partly, on the false assumption that all borrowers of student loans are in the process of making payments. A large portion of student loan borrowers are currently attending the college system and are not required to pay prior to the time of the payment pause. Repaying the federal student loans they owe would lower the debt of the borrowers however, since they did not have to make payment on their student loans and this did not cause a sudden rise of economic activities. The GDP growth would be a few years after in the future, when they’d be forced to begin making payments.
For those who had been paying their loans, the it could lead to some additional spending, which could lead an increase in economic activity. However certain amounts will likely be kept for future use or to help pay off other debts. Both of these actions are beneficial to the borrower, neither of them adds to GDP. While the total cancellation of student loans could help to prevent a decrease in GDP, it is not likely to result in any substantial economic growth in the near future.
This study does not consider the social consequences associated with debt from student loans such as delay in getting married or having kids. Also, it doesn’t discuss what to do about how to pay for college in the future.
A study found that the total forgiveness of student loans could boost GDP by an “average between $86 billion and $108 billion per year.” A different estimate of total student loan forgiveness could yield around $90 billion in cash available to spend annually. Although $100 billion per year might seem like a lot but it’s just 0.43 percent of $23.2 trillion of annually U.S. GDP. Even the larger figure that is $173.83 billion is just 0.75 percent of GDP.
Although forgiveness of student loans provides only a small benefit in consumers in the U.S. economy, it is believed that the financial burdens exceed the benefits to the economy. A study has estimated that every dollar of student loan forgiveness result in between 8 and 23 cents of economic growth for the U.S. economy. A different study estimated that the increase in GDP over a period of 10 years could range between $252 billion and 1 trillion, as compared to the expense of $1.4 trillion in repayment of student loans.