More pressure mounts for US student loan cancellation, while economists advise refinancing

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Education Secretary
Image credits: Towfiqu barbhuiya.

Student loans are big business. Some 43 million Americans currently have student loans, totaling a whopping $1.57 trillion in student loans. Despite President Biden canceling some $2 billion in student loans already, progressives in the Democratic party are increasingly frustrated. This is just a drop in the bucket, they argue, and far more action is required.

A coalition of over 80 progressive House and Senate Democrats wants Biden to cancel up to $50,000 in federal student loan debt per person. But can this actually work, and is it even a good idea?

The case for cancellation

The Democratic group argues that the loan cancellation will relieve economic stress that affects low-income borrowers in particular. This fits with what some economists are saying — it’s not the rich that are most affected by student loans, it’s the poorer borrowers, especially those of Black and Hispanic descent. These are also the borrowers that have the biggest trouble repaying back the loan. In addition, borrowers in low-income brackets often end up paying more than their better-off peers, creating a financially problematic loop that can last decades.

A 2021 data request by Sen. Warren, who spearheads the progressive group, revealed that 4.4 million borrowers are still repaying two decades into their student loan. In a public letter to Biden and Education Secretary Miguel Cardona, the group urged:

“We urge you to use every tool at your disposal to deliver relief to the millions of families inspired by your proposal to make a debt-free college degree within their reach by eliminating up to $50,000 in federal student loan debt for all families before payments resume.”

Economists have somewhat mixed opinions about this, but many seem to regard this type of loan cancellation as a positive effect on the overall US economy. William Chittenden, from the University of Texas, argued the net gains would be “positive but modest.”

According to a report quoted by Chittenden, Warren’s group overestimates the positive impact that loan forgiveness would have. Instead, Chittenden estimates a GDP increase “between $86 billion and $108 billion per year”. Adding $100 billion into the GDP seems like a lot, but it’s only 0.43% of the total US GDP.

In the grand scheme of things, it may not make a big difference, but alleviating the financial burden of millions of struggling loaners at at a small cost to the economy sounds like a win-win plan. Nevertheless, experts warn students not to rely on this, and instead focus on more pragmatic options.

Meanwhile, some economists say it’s a good time to refinance

In an editorial published in Forbes, personal finance expert James Brewer calls for refinancing student loans. In many cases, he argues, it can save money on total interests and help make lower monthly payments. Refinancing a student loan is much like refinancing a mortgage, and if you’re able to refinance your loans at a lower rate, there’s a good chance you can end up saving money in the long run.

The devil is in the details and, as Brewer goes on to explain, the rules may change — and have changed recently. So many loaners may find themselves in a situation where refinancing could be useful. It’s important to note, however, that federal loans often have different options than private loans, and the loan cancellation discussed by Democrats only covers federal loans.

Student loan experts talking to MarketWatch explained that you should always proceed with care when considering refinancing and consider all the possible avenues, including the moratorium currently in place (through May 2022). Furthermore, any refinancing on federal loans may affect potential future loan forgiveness programs, and this is something that should be included in the calculation.

Nevertheless, the experts seem to have little confidence in a major forgiveness program, and suggest that at least in some instances, it may be right to refinance rather than wait (again, if this is favorable).

The bottom line

The possibility of student loan cancellation is enticing, and it seems to make some economic sense. However, it’s a polarizing issue that’s just as political as it is economic. If you’re a loaner, you shouldn’t really rely on it. There are so many different types of loans, and conditions can vary so substantially, that it’s hard to give general advice. Nevertheless, it can’t hurt to keep an eye out for any announcements and see if refinancing would be useful in a particular case.

Biden says he wants student loan payments to resume in May 2022, but with mounting pressure from his own party, it’s hard to say what could happen. Ultimately, the US student loan woes are far from over — so buckle up.

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