Effects of Cancelling Student Loan Debt (2023): Short & Long-Term (2024)

Report Highlights. Canceling student loan debt may add $109 billion on average to the annual GDP for the next 6 years.

• Canceling student loan debt may add up to 1.5 million new jobs.
• Student loan debt cancelation may lift up to 5.2 million American households out of poverty.
• Debt cancelation could potentially increase consumer spending by as much as 3.3%.
• Current debt cancelation plans would reduce the debt burden for 38.3 million Americans with federally-held student loan balances.

Related reports include Student Loan Forgiveness Statistics | Student Loan Debt Statistics | Average Cost of College | Average Student Loan Debt | Student Loan Refinancing | Economic Effects of Student Loan Debt

What May Happen if Student Loan Debt is Canceled

The income-to-debt ratio is the metric by which most legislators propose to measure the breadth of student debt relief. These legislators aim for lower-income borrowers to benefit the most from canceled debt. Political proponents favor canceling between $10,000 to $50,000 in student debt per borrower.

• Canceling student loan debt may add up to 1.5 million new jobs.
• Each time a consumer’s student debt-to-income ratio increases by 1%, their consumption declines by as much as 3.7%.
• Debt forgiveness could potentially increase consumer spending by as much as 3.3%.
• The economy may benefit from increased consumer spending if student loan debt is canceled –it may encourage former borrowers to start families, buy new homes, create or invest in small businesses, or obtain an advanced degree.
• 75% of students indicated that their student debt impacted their ability or decision to purchase a home.
• Would-be entrepreneurs are 11% less likely to start a new business if they owe more than $30,000 in student loan debt.
• When student debt grows by 3.3% the number of new start-up businesses in the country shrinks by 14.4%.
• Cancelation of up to $10,000 for every borrower – including commercially-held Perkins and FFEL loans – may eliminate up to $522 billion or 31.9% of the total federal student loan debt.
• Canceling up to $10,000 per borrower would eliminate up to 29.7% of all student loan debt including privately-held debt.
• 34.2 million or 74.5% of borrowers owe $40,000 or less – eliminating all their debt would erase $490.6 billion in student loan debt.
• 4.8 million borrowers owe $80,000 or more; often, these are graduate and professional degree holders, most of whom are high-income earners and would not benefit from measures to cancel debt.
• Households without the burden of student debt will have reduced vulnerability to economic shocks.

Beneficiaries of Student Loan Debt Cancelation

Research and statistics indicate there may be social benefits to canceling student loan debt, especially as it relates to economic disparity and the debt burden among minority groups. Though both White and Black borrowers both benefit from student loan debt cancelation, any amount considered would financially benefit White borrowers more than Black borrowers. Other groups that would benefit from student debt cancelation include women, the Hispanic community, and the LGBTQ community.

• Black and African American college graduates owe an average of $25,000 more in student loan debt than White college graduates.
• 58% of student loan debt belongs to women.
• Women of color who borrow money to pay for college are 12% more likely to have student loan debt than White women.
• Women would benefit more than men under Biden’s loan forgiveness plan.
• Black and Hispanic women would benefit the most, as 5.4 and 4.7% of this population would be free of student debt, respectively.
• Student borrowers who identify as LGBTQ have an average of $16,000 more in student loan debt than those who are not LGBTQ.
• The unemployment rate among Hispanic people hit 18.9% in April 2020.
• That same month, Hispanic unemployment was 33.1% higher than White unemployment (14.2%).
• The Biden Forgiveness Plan would benefit Black individuals with an associate’s degree the most, as the percentage of those carrying debt would decrease from 19.9% to 12.6%.
• Hispanic individuals with an associate’s degree and Black individuals with a bachelor’s degree would benefit the second and third-most to benefit from this plan.
• 22.3 million or 48.4% of borrowers are under the age of 35 – their debt totals $602.1 billion or 36.7% of all student loan debt.
• 9.1 million or 19.7% of borrowers are 50 and older – their debt totals $400.7 billion or 19.7% of all student loan debt.
• In the figure below, the Moody economic model was unavailable.

Possible Negative Consequences of Canceled Student Debt

The economic consequences of total student loan debt cancelation may be far-reaching. Detractors call student loan debt cancelation “poor economic stimulus”.

• One model estimates an economic multiplier of 0.03 to 0.27, suggesting federal costs may ultimately outweigh economic benefits.
• Education costs skyrocketed in the years following the launch of the federal student loan program; economists posit that widespread loan forgiveness will cause another surge in costs for the next generation of students.
• Full student loan cancelation may disproportionately aid advanced degree holders rather than intended disadvantaged groups.
• Advanced degree holders are also more likely to save their money than spend it and stimulate desired economic growth.
• Canceling student loan debt may result in higher inflation rates.
• Canceling student loan debt may also result in higher interest rates.

Likelihood of Student Loan Debt Cancelation

Proponents of widespread debt cancelation argue for cancelation anywhere between $10,000 and up to $50,000 for each individual borrower. However, the final decision on student debt cancelation is still being debated within the Biden administration and Congress.

• The Biden administration is currently seeking to restart federal student loan payments that have been frozen for nearly 2 years since the pandemic started.
• At the same time, the administration is seeking to clear away the defaults of student loan borrowers who were struggling with payments before the pandemic.
• The American Rescue Plan passed in March 2021 includes a provision that student loan forgiveness issued between December 30, 2020, and January 1, 2026, will not be taxable to the recipient.
• The U.S. Department of Administration has eased restrictions on applications for student loan borrowers who apply for debt forgiveness via the Total and Permanent Disability Discharge program.
• The Senate Committee on Health, Education, Labor, and Pensions recently passed the resolution requesting the President “take executive action to broadly cancel federal student loan debt.”
• A coalition of 23 state Attorney Generals urges “reforms to ease the student loans repayment process and protect student loan borrowers from paying back debt to for-profit and defunct colleges.”
• Advocacy groups have called for student loan debt to be canceled on a broad scale since 2016.

Sources

1. U.S. Department of Education Office of Federal Student Aid, Federal Student Loan Portfolio
2. Government Publishing Office, Senate Resolution 46: Calling on the President of the United States to Take Executive Action to Broadly Cancel Federal Student Loan Debt
3. One Hundred Seventeenth Congress of the United States of America, Title IX, Subtitle G, Part 8, Section 9675: Modification of Treatment of Student Loan Forgiveness
4. Roosevelt Institute, Charron-Chénier et al., Student Debt Forgiveness Options: Implications for Policy and Racial Equity
5. Office of the Attorney General of the State of Illinois, Attorney General Raoul Calls on U.S. Secretary of Education to Further Address Student Loan Crisis
6. U.S. Bureau of Labor Statistics, The Economics Daily: Unemployment Rises to Record High 14.7 Percent in April 2020
7. Center for American Progress’ TalkPoverty.org, Why Student Loan Debt Harms Low-Income Students the Most
8. The Center for Law and Social Policy, Ten Reasons to Cancel Student Loan Debt
9. Pew Trusts, Millions of Federal Student Loan Borrowers Lack Access to Immediate Repayment Help
10. BernieSanders.com, Issues: College for All and Cancel All Student Debt
11. CNBC, Biden Asks Education Secretary to See If He Can Legally Cancel Student Debt
12. Inside Higher Ed, Trump Official to Campaign on Student Debt Relief
13. Medium, Team Warren: I’m Calling For Something Truly Transformational: Universal Free Public College and Cancellation of Student Loan Debt
14. Committee for a Responsible Federal Budget: Partial Student Debt Cancellation is Poor Economic Stimulus
15. iPropertyManagement, Homeownership Rate by Age
16. Social Science Research Network, The Impact of Student Loan Debt on Small Business Formation
17. U.S. Senate Committee on the Budget, Testimony of Richard K. Vedder: Can College Be Made More Affordable? It’s About More Than Student Loans
18. U.S. Small Business Administration Office of Advocacy, 2019 Small Business Profile
19. U.S. Federal Deposit Insurance Corporation (FDIC), The Effect of Student Debt on Consumption: A State-Level Analysis
20. New America, In the Interest of Few: The Regressive Benefits of Federal Student Loan Refinancing
21. Scholarship America, The Far-Reaching Impact of the Student Debt Crisis
22. Canisius College, Life Delayed: The Impact of Student Debt on the Daily Lives of Young Americans
23. U.S. Census Bureau, Consumer Population Survey: Educational Attainment
24. Federal Reserve Bank of St. Louis Department of Economic Research, Personal Consumption Expenditures: Total for United States
25. Brookings Institute: Student debt forgiveness would impact nearly every aspect of people’s lives
26. Levy Economics Institute of Bard College: The Macroeconomic Effects of Student Debt Cancellation
27. CNBC: Starting a business is hard. With student debt, it can be impossible
28. Education Department Releases Final Regulations to Expand and Improve Targeted Debt Relief Programs
29. Biden-Harris Administration Continues Fight for Student Debt Relief for Millions of Borrowers, Extends Student Loan Repayment Pause | U.S. Department of Education
30. Fact Sheet: Black College Graduates and the Student Debt Gap
31. Women & Student Debt – AAUW
32. The Burden of LGBTQ Student Loan Debt
33. Student Debt Cancellation and its Inflation Impact | Richmond Fed
34. Who Is Impacted by Student Loan Forgiveness and How?