The True Cost of Student Loan Forgiveness, And Why It Matters To You

Now that the student loan forgiveness bill which passed on August 24, 2022 has been soaking in for a month and a half, the question of whether it will hurt the United States economy is a reasonable inquiry.

The US government will cancel up to $20,000 for Pell Grant recipients, and up to $10,000 in federal student loans per qualifying borrower. Americans earning less than $125,000, or $250,000 per household, may receive these cancellations. In addition, there is a payment pause on federal loans through 2022.

Before this particular loan forgiveness bill passed, the US Department of Education reported on August 19, 2021, that approximately 300,000 student borrowers who are disabled will receive $5.8 billion in forgiveness.

To alleviate extensive delays in the loan forgiveness process, about 8 million people will have their debt forgiven automatically without the need to apply. The remainder who did not originally apply for loans electronically, will fill out an application sent by the US Department of Education.

Loan Forgiveness May Propel Inflation

The cost of the forgiveness plan is near $400 billion. From the government’s point of view, the purpose is clearly to give people an opportunity to avoid overwhelming debt as they enter the workforce. Not everyone is happy about this; polls average between 51%-60% supporting the plan.

While it is wonderful to enter into full-time work debt-free, the US economy may pay a price. US inflation is rising at the fastest annual pace in four decades. The Federal Reserve is vigorously raising interest rates, while recession risks continue to be substantial.

The reality is that although student debt will be wiped out, increased government spending will counter the work to lower national debt. When inflation increases, so do costs of consumer goods – thus, the seesaw battle between interest rate hikes and increased government spending. Economists who view student loan forgiveness positively, argue that it will lead to greater job mobility and higher wages. Further, they say in the simplest explanation, that higher salaries equate to more taxes being paid into the financial system, which will drive down the current $30 trillion national deficit.

Two Points-of-View

When one looks at student loan forgiveness from a strictly economic point-of-view, President Biden’s plan is making the Central Bank’s work tougher.

When one looks at student loan forgiveness from a student point-of-view, it is a stress reliever. The hope is that loans which are eliminated will result in productive members of society contributing to the tax system for their own gain and the gain of a nation.

Colleges must also play a part to regulate rising costs. Without it, student debt will continue to be a problem.