In this article I analyze the latest stimulus. Examining federal student loan forgiveness from different perspectives. There are strong opinions on either side of this topic, so let’s jump straight to the facts.
The Facts
Up to 10k per borrower of federal student loan balance is eligible for forgiveness. For those earning under 125k (single taxpayers) and 250k (married filing jointly). And if you’re one of the 60% of borrowers who received a Pell grant the eligible amount is up to 20k per borrower. The government anticipates forgiving $8,478 per borrower. Student Loan Forgiveness: How Much Is Canceled, Who Qualifies, How Do I Apply? (cnet.com)
- 45 million Americans have student loan debt – 13% of the total population
- The average borrower owes $28,950
- 92% of outstanding student loans are Federal student loans
2022 Student Loan Debt Statistics: Average Student Loan Debt – Forbes Advisor
Federal Stafford loan borrowers can choose one of four repayment options:
The interest calculation method for new Stafford loans is below. Loans get a fixed rate from the calculation at the time of their issuance.
Repayment Scenario
Assumptions:
Because the 10-year treasury rate was close to 3% this May 2022, Stafford loan rates for new loans this fall is 5%.
I was unable to locate data on the percentage of borrowers who choose each repayment option. For this analysis I’ll assume a 15-year repayment schedule in hope of capturing an average. Those with a Standard repayment of 10 years would see higher payments and those with the max Extended repayment option of 25 years would see lower payments.
Using 10k increments for different scenarios (i.e.: single, married, with and without Pell grants)
Does this amount impact a monthly budget? Well, I suppose it depends.
For some, these monthly payments might be significant.
The average starting salary for a college graduate today is 55k roughly. Assume net after-tax on that income is 4k/mo. Does $79 monthly impact their finances in a meaningful way? Say enabling a first-time home purchase?
55k is the average starting salary for a college graduate. 40% of those attending college drop-out. College Dropout Rates [2022] – US Statistics and Data (thinkimpact.com) I think this stimulus benefits those who dropped more. But there’s only a certain amount of Stafford loans one can borrow each year.
Sources show the forgiveness will apply to Parent Plus loans too. Will Student Loan Forgiveness Include Parent Plus Loans? (yahoo.com).
The Stafford loan program limits borrowing to only $5,500 per year (for student dependents) (Stafford Loan Program: What Is the Max? (thebalance.com). Those dropping out after only one semester or year, may not have 10k in loans. By including Parent Plus loans, more might have been borrowed.
White House estimates the average borrower will have about 8k forgiven.
Sticker price
The plan should wipe out $321 billion in student loans – the taxpayer cost (Student Loan Forgiveness: How Much Is Canceled, Who Qualifies, How Do I Apply? (cnet.com)
As a percentage of annual federal spending. This is about 5.5% of the total each year. Or about 25% of what the government spends on Social Security in a year. About 40% of national defense spending.
When the US government is already borrowing a trillion a year, what’s another $321 billion?
How does this compare to other pandemic stimulus plans? Where $5 Trillion in Pandemic Stimulus Money Went – The New York Times (nytimes.com)
What’s the Verdict?
Inflation
A big concern is the long-term effect of this stimulus. Many argue that stimulus checks sent out in 2020 and 2021 were a catalyst for the inflation we’re seeing today. And the Fed chairman is throwing everything at that problem right now. Risking slamming the brakes on the housing market and encouraging a recession.
I am concerned this additional $321 billion in stimulus will increase inflation in 2023.
Messaging
What about messaging to future college students? Will high schoolers make decisions on assumptions they will receive future loan forgiveness? I haven’t seen any info on whether this will be ongoing. I’m concerned prospective students might reach for more expensive education options. Taking on higher debt burdens, thinking that they will have the same forgiveness in the future.
Tuition Increases
Does this stimulus encourage colleges to hike tuition like the last 20 years?
I’ve tried to take my personal student loan experience out of this article. You can read my experience here. From a couple who paid off 70k in student loans over 15 years, there is a bit of, “sure would have been nice to have 20k of our balance forgiven.” There will always be people with that thought of any stimulus plan. Like those who earned too much for the 2020 and 2021 stimulus checks. Does that create bitterness towards the US government long-term? What does that do to our mindset?
Does this extra couple hundred dollars a month help 45 million Americans with inflation at the grocery store, gas station and housing? It might for some. Does it make inflation worse in future years?
I’ll be watching to see how this one plays out.