I have to admit it, not having to repay my student loan debt sounds great.
Well, not having to repay any of our debts at all sounds even better.
We could rack up as much debt as possible and live our lives as we wish. However, that’s not how the world works.
But just for fun, let’s imagine a scenario where all $1.6 trillion of all outstanding student loan debt is forgiven.
What happens next?
Here’s what you need to know.
Difference between Bernie Sanders and Elizabeth Warren
Sen. Bernie Sanders (I-VT) and Sen. Elizabeth Warren (D-MA) have different student loan forgiveness plans.
Sanders wants to forgive all $1.6 trillion of outstanding student loans, including both federal and private student loan debt.
Sanders’ student loan forgiveness plan has no eligibility requirements; all 45 million student loan borrowers are eligible for student loan discharge. Sanders will fund his student loan forgiveness plan through a new tax on financial transactions, which he expects could raise more than $2 trillion over the next 10 years.
Warren wants to cancel student loan debt for more than 95% of borrowers, and would entirely cancel student loan debt for more than 75% of Americans with student loan debt.
Warren’s plan cancels $50,000 in student loan debt for every person with household income under $100,000 and cancels substantial debt for every person with household income between $100,000 and $250,000.
Like Sanders, Warren would fund student loan forgiveness through new taxes.
Both Sanders and Warren say borrowers would not pay income taxes on the amount of student loans forgiven.
What are the benefits of student loan forgiveness?
Both Sanders and Warren believe that student loan forgiveness would help millions of borrowers lead a better financial life and stimulate the economy.
For example, student loan forgiveness would help free up capital to help borrowers buy a home, save for retirement, launch new businesses, and start a family. Most importantly, it would help to reduce the wealth gap and provide economic stimulus to the middle class.
While there are millions of Americans hoping for student loan forgiveness, there are lots of opponents.
According to Moody’s, the economic impact would be relatively minimal, similar to a “tax-cut-like stimulus to economic activity” in the near-term.
Cancel All Student Loans: Unintended Consequences
While Moody’s believes student loan cancellation will improve small business and household formation, as well as increased homeownership in the long term, Moody’s also found the potential for:
- Moral hazard:Future students could borrow more student loan debt because they expect their student loan debt will be forgiven.
- Higher student loan debt:If future borrowers don’t receive student loan forgiveness, these borrowers potentially will have more student loan debt.
- Lower Revenue:The federal government would lose $85 billion gross in lost principal, interest, and fees if federal student loans are forgiven.
- Wealthy Borrowers Benefit:If every borrower receives student loan forgiveness (the Sanders plan), then borrowers who otherwise could pay off their student loan debt (without forgiveness) won’t, which could limit the economic benefit.
It is impossible for someone to fully predict the full economic benefit, as there are several factors to consider.
Potential questions include, but are not limited to:
- How much student loan debt is forgiven?
- Who ultimately pays for student loan forgiveness?
- Whether there are offsets to recoup lost student loan revenue.
- Would borrowers who already paid off their student loans get paid back?
- Do future borrowers get student loan forgiveness too?
Next steps you should take
As politicians debate the future of student loans, make sure to understand all your options for student loan repayment.
Start with these four pillars: