Cancel America's Federal Student Loan Debt, All of it

Jayden D'Onofrio - Teen Aspect - May 25th, 2022
Activists in Los Angeles protest the rising costs of student loans in September 2012 (David Mcnew/Getty Images)
 

For the first time since 2020, the United States economy has contracted, this time at a worrying 1.4% annualized rate. Originally predicted to carry out a 1% rise in gross domestic product (GDP), the first quarter of 2022 presented the realities of the United States precarious economic situation amidst a widening geopolitical crisis in Ukraine, agonizing supply chain problems, and unprecedented inflationary rates. Consumer spending, the backbone of the U.S. economy, rose an impressive 1.1% but is rather insignificant when accounting for the fact that consumer prices have risen at an annualized rate of over 7% and Americans’ incomes post-taxes once more have fallen for the fourth quarter in a row[i].


Therefore, citizens are having to combat rising inflation rates and consumer costs with lower average incomes than previous months.


If the United States wishes to encourage consumer spending to supplement economic growth, the government must absolutely cancel all of the federal student loan debt, a figure that amounts to a whopping $1.61 trillion and ties down 45.7 million Americans[ii]. Not only would cancelling the federal student loan debt promote intense economic growth, but it would also ease the fierce domestic housing market, present massive benefits for the nation’s minority population, and mitigate the vulnerabilities a possible forthcoming recession could cause.


Between excuses of unfairness and hesitancy to increase the government deficit, cancellation of the entire federal student debt is apparently not even on the table for the Biden administration, an unfortunate miscalculation that must be revised.


Broad-based cancellation of federal student loan debt has been discussed for decades but is more crucial now than ever. Lackluster economic production stemming from the COVID-19 pandemic and geopolitical events outside of the control of the United States has painted a grim future for the world’s largest economy in both the short and long-term. Americans have been paralyzed with dismal inflation rates, elevated energy costs, and deflating income wages. If consumers continue to deal with multiple destructive economic factors at once, they will wane off spending money, a measure that is essential for the longevity of the U.S. economy.


Alone, consumer spending accounts for nearly 70% of the total U.S. economic production, a figure that amounted to an immense $13.28 trillion in 2019[iii].


The desecration of consumer spending effectively immobilizes the U.S. economy, which in turn leads to high unemployment, poorer living conditions, and more debilitating consequences. For example, during the COVID-19 pandemic in 2020, the average American household spent 2.6% less in comparison to 2019[iv]. What resulted, as we all know, was an extreme downturn of the United States economy forcing layoffs on a scale not seen since the 2008 great recession. The complete shutdown of consumer spending caused the worst contraction of the national economy ever seen at an eye-popping 19.2% annualized rate[v].


While such a complete shutdown is unlikely to come for the coming decades, it is important to analyze the data stemming from such an event as it highlights the importance of consumer spending to the well-being of the national economy. This correlation relates to the situation present in 2022 as the inflation rate of 7.5%, falling overall annual American incomes, and increasing potential of an incoming recession present perfect circumstances to limit consumer spending. Once again, cancelling all of the nation’s federal student loan debt is a perfect solution to such a crisis, but how?


For one, such an action would promote a boost in the national GDP by a range of $86 billion to $106 billion per year, according to William Foster, vice president of financial services company Moody’s. With federal student loan debt totaling $1.61 trillion, borrowers typically paid between $200 and $299 per month[vi]. In effect, the cancellation of all federal student loan debts would free up hundreds of dollars for millions of people in the United States every month, allowing for further stimulation of the economy through consumer spending. Extra money from cancelling debts would serve as a comparison to the stimulus checks many Americans received during the COVID-19 pandemic.


The domino effect of so much money freed up towards spending would be momentous. To illustrate, people once burdened with student debt may open a small business, creating more jobs for the economy, and providing a stable income for people that were formerly not able to get a job for whatever the reason may be. In the end, more jobs for people may lead to more houses being purchased, driving up the demand for construction, plumbing services, lawn care, and so much more, fundamentally leading to a stronger circle of citizens.


But such wide-reaching benefits to the health of the national economy rely on the cancellation of the federal student loan debt.


Amid so many people paying off student loans, households often budget their money in order to pay off their debts as quickly as possible. However, this leads to constraints on consumer spending presenting itself as an obstruction to a strong economy. In addition, federal debts disproportionally affect lower income students which further stresses the status of inequality within the United States. For example, 44% of all dependent undergraduate students coming from families with an income of less than $30,000 dealt with debt levels of more than $12,400 in 2012[vii]. Furthermore, this is an effect that has been developing over time, evident by the fact that in 2009, the lowest income zip codes across the nation saw their student debt burdens represent 56% of their income, eventually rising to 94% in 2018[viii]. Reeling lower income communities out of debt effects the national economy on an incredible scale while improving the lives of so many Americans, vital to the survival of the United States long-term economic growth.


While cancelling federal student debt presents a fantastic opportunity to drive the United States economy into further prosperity and prevent stagnation or perhaps even a recession, it would also revamp the chaotic domestic housing market.


Alone, student debt has delayed borrowers in purchasing a home, often causing a postponement of five to seven years for the procurement of a house (National Association of Realtors). Lawrence Yun, chief economist of the National Association of Realtors, predicts home sales could increase by over 300,000 annually if “people were not saddled with large student debt.” Home prices have been extremely high compared to previous years with the short supply of houses available likely being the leading cause of such unprecedented times. For example, the number of houses available for purchase on any given day was down an astonishing 24.5% compared to 2021[ix]. Consequentially, eliminating federal student debt would further exacerbate the issue of housing costs but may prove to be a tremendous positive as it would likely enhance pressure on businesses to construct new homes at a faster pace. As a result, the economy would be presented with exceptional gains through an uptick in demand and consumer spending.


Government intervention to promote the housing sector may be necessary but is absolutely needed currently anyways. Sometimes the best way through a crisis is to make it worse, thus allowing the underlying issues to be more obvious and remediable. Home ownership is extremely important to a family’s ability to build their wealth. Families who own homes had a median net worth of $255,000 in comparison to the average renters $6,300[x]. When an American family procures the ability to own their own home, not only are they supporting themselves, but the economic well-being of the entire economy.


With economic inequality so prevalent within the nation, how will broad-based loan cancellation support Hispanic borrowers specifically? With Hispanic graduates on average earning less in comparison to their debts, they are statistically more likely to be driven to a default. For Hispanic borrowers under the age of 40, just about 19% fell behind on student loan payments in 2019, a worrying trend that will likely be compounded in the coming years if the underlying issues present in the national economic structure are not confronted[xi]. Not to mention, Hispanic borrowers are falling behind on payments all the while having culminated a higher debt in general compared to their White peers. What results is Hispanic students brought into a fight in paying for their debts with less average incomes than their peers and a higher overall loan that is vital to repay to stave off a default.


Such constraints eliminate consumer spending that would otherwise be present in the everyday lives of Hispanic Americans while simultaneously degrading their living conditions to proportions that should not exist in the world’s largest economy. In addition, debts cause issues for Americans in developing retirement savings and wealth accumulation, a perfect example of why Hispanic Americans are burdened with inequality so heavily compared to their White peers. With financial problems, glaring mental health issues, and the unfortunate abolition of various American standards, eliminating the federal student loan debt would go a long way for Hispanic Americans in a time where the visibility of inequality continues to trend to horrific levels.


Furthermore, the minority group to be faced with some of the highest benefits are African Americans. Unfortunately, throughout the history of the United States, African Americans have been relegated to increased rates of poverty, unfathomable living conditions, and less opportunities of education in comparison to their white peers. For example, on average, a white family accumulates 10 times the amount of wealth as the average black family[xii]. The realities are almost just as bad even when comparing white college graduates to black graduates, as the gap is still relevant to a nearly seven-time differential. If the government truly wishes to endorse a rise in black American prosperity, as they have claimed for decades, they would wipe away their remaining school debts. Many black college graduates are forced to take out excessive amounts of government loans in order to afford the costs of college in comparison to their white peers. This is likely due to the intense disparity between the wealth of the average white and black family. What has resulted is a modern form of economic enslavement, where black families are prevented from building themselves a reliable path to prosperity thanks to the encumbering of massive student debts to even reach a solid education.


Altogether, the benefits of cancelling all federal student loan debts seem quite fantastic, so what is holding us back?


First, many critics claim cancellation is unfair to previous and future generations of college graduates, a rather unsubstantiated and emotional statement. If we applied the same logic to everything, how would the United States possibly function? Was the implementation of stimulus checks during the COVID-19 pandemic unfair to every generation that did not receive such an economic help? Or how about the bailing out of multiple banks during the 2008 great recession? Both of the aforementioned events in American history present unprecedented times in economic turmoil where immediate action was necessary, regardless of who may be deemed to be treated ‘unfairly’ in such a case.


If improving the lives of tens of millions of Americans can be regarded as unfair, then the true meaning of the American way of life has strayed ridiculously far from what it is supposed to represent.


In addition, and in my opinion the only valid argument against federal student loan cancellation, is the predicted increase in inflationary rates. With inflationary rates already at record breaking levels, broad based loan cancellation would certainly increase it but by a measly 0.1 to 0.5 percentage points[xiii]. While obviously it may seem like a disastrous increase during the current inflationary climate, such a small rise is actually rather irrelevant when considering the upcoming quantitative tightening the Federal Reserve plans to carry out in its fight against inflation. Coordination between the Federal Reserve and the national economy is incredibly important as it minimizes its balance sheet to reduce the rise in inflationary rates, all while trying to promote continued economic growth through consumer spending.


American ideals are rooted in promoting economic prosperity as a means to showcase the modernity of the nation, cancelling all of the federal student debt would only perpetuate such a belief. Between the benefits to the national economy, potential to revamp the chaotic housing market, and the immense positives minorities will face, the choice is clear: cancelling federal student loan debt will bring forth valuable macroeconomic attributes that will contribute to a stronger society. Progressives are leading the charge on the importance of illustrating economic freedom for all Americans, but will President Biden follow suit?


References

[i] Mutikani, L. (2022, April 29). U.S. consumers shrug off high inflation, lean on savings to boost spending. Reuters. Retrieved May 24, 2022, from https://www.reuters.com/business/us-consumer-spending-beats-forecasts-march-inflation-soars-2022-04-29/#:~:text=Consumer%20spending%2C%20which%20accounts%20for,of%200.2%25%20as%20previously%20reported

[ii] Helhoski, A., Clark, C., & Beresford, C. (2022, May 11). Will student loans be canceled? Where we stand. NerdWallet. Retrieved May 24, 2022, from https://www.nerdwallet.com/article/loans/student-loans/joe-biden-student-loans

[iii] Helhoski, A., Clark, C., & Beresford, C. (2022, May 11). Will student loans be canceled? Where we stand. NerdWallet. Retrieved May 24, 2022, from https://www.nerdwallet.com/article/loans/student-loans/joe-biden-student-loans

[iv] News release. Personal Consumption Expenditures by State, 2020 | U.S. Bureau of Economic Analysis (BEA). (2021). Retrieved May 24, 2022, from https://www.bea.gov/news/2021/personal-consumption-expenditures-state-2020

[v] Mutikani, L. (2021, July 29). U.S. economy contracted 19.2% during COVID-19 pandemic recession. Reuters. Retrieved May 24, 2022, from https://www.reuters.com/business/us-economy-contracted-192-during-covid-19-pandemic-recession-2021-07-29/

[vi] Brandt, C., Sheiner, L., & Yilla, K. (2022, March 9). What's the government done to relieve student loan borrowers of their burden during the Corona Crisis? Brookings. Retrieved May 24, 2022, from https://www.brookings.edu/blog/up-front/2020/04/16/whats-the-government-done-to-relieve-student-loan-borrowers-of-their-burden-during-the-corona-crisis/

[vii] Freedman, J. (2014, February 11). Student loans are a drag on the economy and Society. Forbes. Retrieved May 24, 2022, from https://www.forbes.com/sites/joshfreedman/2014/02/11/student-loans-are-a-big-drag-on-the-economy-and-society/?sh=66b8937e4bc1

[viii] A new liability on the nation's balance sheet. Mapping Student Debt. (n.d.). Retrieved May 24, 2022, from https://mappingstudentdebt.org/#/map-3-labor-markets

[ix] Bove, T. (2022, March 7). There is an 'extreme shortage' of homes for sale as Ukraine invasion affects housing market. Fortune. Retrieved May 24, 2022, from https://fortune.com/2022/03/07/ukraine-war-extreme-housing-shortage-redfin/

[x] Holzhauer, B. (2021, August 24). Here's the average net worth of homeowners and renters. CNBC. Retrieved May 24, 2022, from https://www.cnbc.com/select/average-net-worth-homeowners-renters/

[xi] Daugherty, G. (2022, May 6). Student loans and the Racial Wealth Gap. Investopedia. Retrieved May 24, 2022, from https://www.investopedia.com/student-loans-and-the-racial-wealth-gap-5075215

[xii] McIntosh, K., Moss, E., Nunn, R., & Shambaugh, J. (2022, March 9). Examining the black-white wealth gap. Brookings. Retrieved May 24, 2022, from https://www.brookings.edu/blog/up-front/2020/02/27/examining-the-black-white-wealth-gap/

[xiii] Cancelling student debt would add to inflation. Committee for a Responsible Federal Budget. (2022). Retrieved May 24, 2022, from https://www.crfb.org/blogs/cancelling-student-debt-would-add-inflation



0 comments
Teen Aspect (1)_edited_edited.png