Student Loan Forgiveness Could Be Lifeline for Millions and Boost for the Economy

Today, U.S. District Judge J. Randal Hall is allowing President Biden's student loan forgiveness plan to move forward. The plan aims to cancel up to $10,000 in federal student loans for eligible borrowers and up to $20,000 for Pell Grant recipients. 

Financial Freedom for Borrowers

The forgiveness plan could offer significant financial relief to millions of Americans who are currently burdened by student loans. On average, federal student loan borrowers owe around $37,000, and 20 years or longer to pay off.

Reducing or eliminating this burden for young adults could improve financial health, allowing them to allocate money toward savings, investments, starting small businesses, and purchasing homes or vehicles.

The plan is expected to be particularly beneficial for lower-income borrowers and minority groups, who are often disproportionately affected by student debt.

For many of these individuals, debt forgiveness could provide an opportunity to improve their financial situation not before possible under the burden of massive student debt.

Boost to Consumer Spending and Economic Growth

Debt forgiveness could also lead to an increase in disposable income for millions of borrowers, potentially stimulating consumer spending. Consumer spending accounts for about 70% of the U.S. economy, and additional financial flexibility for borrowers may result in increased demand for goods and services.

In 2022, a study performed by the Roosevelt Institute estimated that student loan forgiveness could boost borrowers' net worth, increasing their confidence and spending power. Cancelled debt could increase average yearly income for borrowers by $3,000 over a 10-year period.

This could positively affect sectors such as housing, retail, and travel, which have seen suppressed demand from indebted individuals. The housing market, in particular, may benefit as student debt has been a barrier to homeownership for many. Student debt has led to a 20 percent decline in homeownership among young adults.

A cancellation of student debt would most likely entice more young adults to pursue entrepreneurial ventures and launch businesses, which will continue to drive economic growth.

Link to study

Concerns of Inflation

Critics of the student loan forgiveness plan have raised concerns about its potential impact on inflation. Inflation occurs when the demand for goods and services exceeds supply, driving up prices. By increasing disposable income for millions of Americans, the plan could lead to higher demand and, in turn, contribute to rising prices.

A report by the Committee for a Responsible Federal Budget suggests that student loan forgiveness could raise inflation by up to 0.3 percentage points. While this increase may seem small, it could still affect the cost of living, particularly in an environment where inflation is already a concern due to supply chain disruptions, labor shortages, and other post-pandemic factors.

Moving Forward

Biden's student loan forgiveness plan carries significant economic implications. It promises financial relief for millions of borrowers, potentially boosting consumer spending and overall economic growth.

However, concerns about inflation remain, and the long-term impact of the plan on the economy will depend on how borrowers respond and how inflationary pressures evolve.