In this Issue:

  • Student Debt: From Forbearance to Forgiveness
  • Is The Biden Stimulus Plan Too Big?
  • Australia-China Trade Tensions

“When you find yourself in a hole, stop digging.” This time-tested maxim can work well for finding a path out of personal debt. Small behavioral changes can allow people to stop running up credit accounts and start paying them down. But when the “hole” represents $1.7 trillion in liabilities held by nearly 48 million people in the U.S., simple frugality will not be sufficient. Greater interventions may be needed.

Momentum is gathering around a debt forgiveness program for student loans. We agree the problem calls for policy responses, but we do not believe cancelling loans is the correct course. It is neither efficient nor equitable, and leaves root causes of the problem unaddressed.

The conditions we outlined in our last discussion of student debt have not changed; only the amounts of money and borrowers have continued to grow. The cost of college tuition has consistently outpaced broader measures of inflation, but the value of a degree remains high. College-educated workers earn higher wages and experience lower unemployment, so students continue to put themselves into debt to better their long-term fortunes. Some succeed, while others do not.

Weekly Economic Commentary - 02/12/21 - Chart 1

These conditions have led to a generation-defining burden of student debt, which carries costs beyond just financial obligations. Fiscally responsible young adults will focus their budgets on their student loans, but that can crowd out other important investments like retirement savings and homeownership. Couples may defer marriage and family formation until their finances are under control, weighing on the country’s already-slow birth rate. Meanwhile, those with the fortune of family support allowing a debt-free graduation will start their adult lives without the same financial burden, raising inequality.

Mild remedies are already available. Forbearance on federal student loans has always been an option during hardships like job loss. The CARES Act granted all federal borrowers a temporary forbearance, now extended through September 2021. Income-based repayment (IBR) plans for federal loans are available, which allow borrowers with low or moderate incomes to cap their student loan payments at 10% of their disposable income; any unpaid balance is forgiven typically after 20 years. While these programs can help to balance household budgets for a time, the loans remain prominent in borrowers’ lives.

“Student debt forgiveness is not a progressive policy”