Imagine this scenario: All $1.6 trillion of your student loan debt is forgiven. Now, what happens next?
Here’s what you need to know.
Student Loan Forgiveness
Sen. Bernie Sanders (I-VT) and Sen. Elizabeth Warren (D-MA), who are both 2020 presidential candidates, 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 cancel 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.
So, what would happen if all - or even most - of the $1.6 trillion of student loan debt is cancelled?
Cancel Student Loans: Here’s A Potential Scenario
Sanders and Warren believe that among other benefits, student loan forgiveness would help: borrowers buy a home, save for retirement, launch new businesses, and start a family; and reduce the wealth gap and provide economic stimulus to the middle class.
However, Moody’s found a much different result. 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. While Moody’s believes student loan cancellation will improve small business and household formation, as well as increased home ownership in the long term, Moody’s also found the potential for:
- Moral hazard: Future student borrowers could borrow more student loan debt because the 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 in loss 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.
No one can predict the full economic benefit, which will be driven by several factors, including: how much student loan debt is forgiven, who ultimately pays for student loan forgiveness, whether there are offsets to recoup lost student loan revenue, how borrowers spend their money after receiving student loan forgiveness, and other factors. Would forgiving all mortgage debt, credit card debt or auto loan debt have a different economic impact? Would borrowers who already paid off their student loans get paid back? Do future borrowers get student loan forgiveness too? Are there alternative approaches to raising taxes?
Your Next Action Steps
As politicians debate the future of student loans, make sure to understand all your options for student loan repayment.
Start with these four pillars:
- Student loan refinancing
- Student loan consolidation
- Income-driven repayment plans
- Student loan forgiveness
This student loan quiz takes less than one minute to complete and provides you with a free, customized student loan repayment plan.
This article originally appeared on Forbes.
