The Dilemma Surrounding Student Loan Forgiveness

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Posted: Jun 02, 2022 3:20 PM

It’s easy to see why there’s so much support for “student loan forgiveness” among the roughly 15% of US residents who still hold it. That sentiment may be particularly evident among those who hold nearly half of that debt — doctors, lawyers and other higher-degree holders, who have used student loans to rack up lucrative degrees, according to Forbes contributor Frederick Hess.

But for the other 85% — among them the taxpayers who distribute much of the burden of reimbursement — frankly, the idea may be about as appealing as throwing a stack of $20 bills down the dresser.

Through several proposed scenarios, here’s what we see according to blogs by Fed economists after the release of last month’s report from the New York Federal Reserve on the matter.

These Fed economists – Jacob Goss, Daniel Mangrum and Joelle Scally – say most of the proposals emerging since the 2020 election cycle have centered on the blanket cancellation of federal student loans (typically $10,000 or $50,000) or cancellation of loans with certain income limits for eligibility. The ability to pinpoint even close to the amount allegedly collectively owed for outstanding and defaulted student loans is problematic, however.

This is – it seems – because there is no reliable way to capture the entire population that holds this debt, and no way to analyze the total debt between those who owe bank loans. federal and commercial (or both). The New York Fed therefore went ahead and analyzed federal loan data exclusively.

Therein lies the more mind-boggling financial implications of the details, to follow.

By calculating the dollar value of the only federal loans that would be canceled under the proposed policy—Direct Loans Disbursed by the Federal Government; through the Family Federal Education Loan (FFEL) program and subsequently consolidated into the Direct program or sold to the federal government; and defaulted Direct or FFEL program loans – the Fed team calculated the total outstanding balance due in December 2021 to be $1.38 trillion.

For emphasis, we rephrase: $1.38 trillion.

Reviewing each proposal, Fed economists began with the possibility of limiting the forgiveness to a maximum of $50,000 per borrower – which they said would cost $904 billion and forgive the total balance at $29.9 million. , or 79% of the 37.9 million federal borrowers.

That would equate to an average of $23,856 per borrower, a nice chunk of change by any measure. Adding insult to financial harm, the Fed blog says this threshold would also forgive 77% of all delinquent or defaulted federal student loans before the pandemic.

Economists say another idea of ​​forgiving $10,000 per borrower would wipe out $321 billion of loan-only fueled debt; eliminate the entire balance for 11.8 million borrowers (31.1%); and clear 30.5% of pre-pandemic delinquencies or defaults, which equates to $8,478 in forgiveness on average for each borrower.

We don’t claim to speak for the 70% of Americans who would be forced to pay the costs of any federal pardons, let alone the billions (more likely trillions) in losses that could be reversed by private lenders – but at best these ideas seem half-baked – and at worst, a bad plan, no matter how you stack them.

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