The Department of Education (DOE) has given the more than 40 million Americans who have direct federal loans and PLUS loans an extra month of respite. The forbearance extension, the pause in the accumulation of interest and the suspension of collection activities will run until January 31, 2021.
The decision should help borrowers prepare for the future. Although President-elect Joe Biden has not pledged to take any specific action on student loans, he is expected to continue to freeze payments and interest before considering his campaign politics education loan goals, which included : assistance for undergraduate borrowers earning $ 25,000 or less; automatic enrollment in the income-based repayment program, with the option to opt out if borrowers so wish; and changes to the taxation of debt forgiveness. The Biden plan also envisioned canceling up to $ 10,000 in debt for students working in national or community service.
The idea of a wider student loan forgiveness always sounds like a great concept, but is it? The recent Federal Reserve Survey of Consumer Finances (FCS) noted that the nearly $ 1.6 trillion in student debt continued to be the largest source, in terms of dollars, of non-mortgage debt owed by American families. This fact might lead you to think: let’s get rid of it. But critics argue it would favor the wealthier people. The Fed’s investigation highlighted the problem, which became a flashpoint in the conversation: “Student debt has historically been disproportionately held by high-income families, which can likely support their families. loan repayments. 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 debt.
Researchers Sylvain Catherine, from the Wharton School of Business at the University of Pennsylvania, and Constantine Yannelis, from the Booth School of Business at the University of Chicago attempted to address the problem in a recent working paper. They found that “forgiveness would benefit the top decile just as much as it did the bottom three deciles combined” and “blacks and Hispanics would also benefit much less than the sales suggest.” And of course, canceling student debt wouldn’t benefit millions of Americans who didn’t go to college at all.
Hal Singer and Shaoul Sussman refute the argument that student debt cancellation is regressive in the American Prospect, saying it would “further reduce the student debt burden for low-income indebted households. In other words, low-income households would get the greatest relief in relation to their income. “
A closer look at the numbers strengthens the case for capping student loan forgiveness at a lower level. The Brookings Institution has found that “a very small fraction of all student loan borrowers have very large loans. Six percent of borrowers have more than $ 100,000 in debt, ”which represents about one-third of outstanding debt. “At the other extreme, 18% of borrowers have less than $ 5,000 in student debt. They collectively owe 1% of the outstanding debt.
While borrowers are likely to be relieved, is forgiveness the best way to stimulate economic activity? Jason Furman, former chief economist to President Obama, is not so sure. He tweeted: “I see very little overall help in this.” The singer and Sussman don’t buy it. They cite research from the Federal Reserve Bank of New York that shows student borrowers refrain from buying homes or cars because of their debt load. Without the debt anvil hanging over them, they might be able to participate more fully in the economy.
Where is this taking us? There are no simple answers, but I hope the post-COVID country is focusing its energy on how to fix the failing higher education system, root and branch, not just the associated loan programs. to diplomas.
Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she accepts comments and questions at [email protected] Check out his website at www.jillonmoney.com.