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The Pros and Cons of Student Loan Forgiveness

by Data Driven Consumer 14 days ago in personal finance

As America's student debt crisis grows larger, calls for cancelling student loans grow louder.

Image by Mary Pahlke from Pixabay

The topic of student loan forgiveness has been gaining traction in recent years due to the fact that tens of millions of Americans hold a total of well over one trillion dollars in student debt. While forgiving college debt would definitely offer relief to millions of borrowers, as well as provide a boost to the economy, it doesn't come without some potential downsides as well. Furthermore, there's a big debate over just how much debt should be forgiven. Here are the biggest pros and cons of student loan forgiveness.

Pro: Instant Relief to Borrowers

Millions of student loan holders struggle to repay their debt. That's especially the case for borrowers who hold a substantial amount of debt relative to their income. Unfortunately, that leaves them with less available money to spend on things like housing, healthcare, and other essential expenses. That's also why millions of young people still live at home with their parents, since they can't afford to fully support themselves. Therefore, student loan forgiveness would provide immediate relief for millions of borrowers. Even just a partial cancellation could still reduce monthly payments, as well as the duration of payments. Borrowers would see their disposable income rise and personal finances improve.

Con: Potential Moral Hazards

While student loan forgiveness would make current borrowers happy, many of those who repaid their loans would likely feel like it was unfair to them. Furthermore, forgiving student debt could create some moral hazards in the future. For example, future borrowers might decide not to repay their loans because they expect the federal government to forgive them. Also, students might decide to attend more expensive universities out of a belief that they can get away with borrowing more money to attend them. Consumers might even start demanding that the federal government cancel non-educational debt - like mortgages, credit card debt, and auto loans. Basically, the concern is that student loan forgiveness could make consumers less responsible when it comes to borrowing money.

Pro: Reduce Debt-to-Income Ratio for Millions of Consumers

In addition to reducing or potentially eliminating monthly payments, student loan forgiveness would also reduce the amount of debt held by millions of consumers. A lot of student debt holders put off important life milestones like buying a home, starting a family, or even just moving out of their parents house. Therefore, reducing the amount of debt held by student loan borrowers would help them afford to do those things. Furthermore, since student debt cannot be cancelled in bankruptcy, many borrowers who struggle with their payments opt to prioritize the student loan and not pay their other debts, like auto loans and credit cards. That means student loan forgiveness could reduce the amount of defaults on other types of consumer debt.

Con: Potential for Huge Tax Bill

The biggest pitfall of student loan forgiveness for borrowers is that they could get hit with a massive tax bill when they file their income taxes. That's because any amount of student debt cancelled would be counted as taxable income for borrowers. Even if the president has the authority to cancel student debt via an executive order, they don't have the power to change tax laws on their own. Unfortunately, borrowers who have their loans forgiven could end up owing the Internal Revenue Service a lot of money - because only Congress has the power to amend tax laws.

Pro: Boost to the Economy

America's student debt crisis is a drag on the economy. As mentioned, since millions of Americans hold a high amount of student debt, it impacts their ability to spend money on things like housing and other big ticket items. Therefore, student loan forgiveness could boost economic growth by wiping away debt for millions of consumers. That's because they would no longer have to spend their money on loan payments. Instead, they could afford to do things - like buy homes and start families - that are key to spurring economic growth. If nothing is done to help borrowers, it will likely have even more negative consequences on the economy in the future.

Con: Add to the National Debt

Finally, another big potential downside of student loan forgiveness is the fact that taxpayers will be on the hook for more than one trillion dollars in student debt. Since the federal government has been running huge deficits for decades, it will likely have to borrow money to forgive loans, further adding to the national debt. Unfortunately, the national debt accrues interest, which taxpayers must pay each year. Furthermore, the federal government would no longer be collecting interest from student loan payments, so its budget deficit would likely get bigger due to less revenue. Taxpayers should understand the full ramifications of student loan forgiveness before any action is taken.

Image by Steve Buissinne from Pixabay

In short, whether you have student loans or not, everyone is impacted by America's student debt crisis. That's because consumers who are burdened with high levels of debt are unable to spend money on big ticket items that drive strong economic growth. Also, millions of borrowers would no longer have to fear financial ruin if they are unable to make their payments. However, blanket student loan forgiveness can create its own set of problems as well. For example, if student debt is forgiven, it doesn't mean that it will just disappear. Taxpayers could still be on the hook for any taxes owed on cancelled student loans. Therefore, the solution to America's college debt crisis will require a balanced approach - one that helps borrowers and strengthens the economy, but isn't too unfair to taxpayers. Furthermore, it must be done in a way that minimizes potential moral hazards to keep consumers from being irresponsible with their money.

personal finance
Data Driven Consumer
Data Driven Consumer
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Data Driven Consumer

My name is Evan Crosby. Welcome to the home of my new publication: The Data Driven Consumer. Gain valuable insights from informative, engaging content about the most important topics that impact your money, your technology, and your world.

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