Note: These proposals would benefit me as I am paying off student loans.
Individuals with student loans need to pay them off. If a student wants to go to college/university they can. While the best schools can be financially out of reach for those of modest means not all institutions are priced beyond those of modest means. However, that being said the student loan debt burden is causing a drag on the economy; therefore, taking a look to see if any modification to the program could benefit the economy is in order.
Depending on which source you look at, the average student loan debt is in the range of $25,000 and $30,000. Using the smaller figure, this leads to an average payment of $280 a month. Take someone who has a post graduate education, and the figures go up, and they go up quickly. In my case, the payment is, in round figures, $1,000 a month. Now, I’m not the norm since I have both a M.S. and J.D., but others who go to pricier institutions can have debt service in the same range. The problem for the economy is that the payments take away from disposable income which in turn reduces consumption and the underlying economic engine is dampened by want of demand.
The first order of business when discussing modifying student loans is to discuss how to pay for the changes. No matter how economically beneficial a change can be if the proposal isn’t able to be paid for then it’s not economically viable. The national debt load is a significant economic burden and any change in policy needs to be at least revenue neutral or any economic benefit is cancelled out by the increased national debt. The funding for the changes will be discussed with each specific proposal.
The student debt burden can be broken down into two categories, borrowers who are wholly indebted to government backed loans, and borrowers who have a combination of government backed and private loans. Since addressing both categories would make for a prohibitively long post, this post will only address the first category. Two tweaks can generate economic benefit in a revenue neutral manner.
The first is to do away with the subsidized Stafford loans. This reduces the amount of outlays the government makes for borrowers and frees up assets to be used to reduce overall indebtedness. Specifically, change the rules of the program to where the amount that the government would have spent on subsidizing interest payments is paid out as a grant reducing the overall level of indebtedness for the borrower. This is revenue neutral, but can make a noticeable difference in overall debt load. If a student were to take the maximum amount of subsidized loans, the government interest payment is $2,650 (sorry you have to do the math, the link only gives the maximum amount allowed to be borrowed). This reduces the average debt load by a touch over 10{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} and frees up $28/month ($336/year) in payments. This amount is small, and that makes it more likely that the amount will be frittered away rather than placed into a savings account.
The second way to tweak the program and generate economic benefit is to place all government backed loans on administrative forbearance for the month of December. Since interest accrues in forbearance the move is revenue neutral (technically slightly revenue generating.) Because the administrative forbearance is in December, there’s a high likelihood that the amount will be spent on Christmas related activities. This tweak injects an average of $280 per borrower into the economy. Combining the two areas would generate $588/year ($336 in savings + $280 December – $28 that would already be saved in December.)
Now you may be thinking, that’s all well and good, but how much impact will $588/year have on the economy? In 2014, forty million individuals had student loan debt. So, we take $588 and multiply by forty million and get a result of $23.5 billion. Remember, half of that, $11.75 billion, is generated in December creating a noticeable spike in discretionary income at the time when consumers are most likely to spend. For context, the average Christmas spending last year was $882.
It’s not an economic Christmas miracle, but it’s a nice bump to the economy.
