Wednesday, August 12, 2009

Would Forgiving Student Loans Stimulate the Economy?

OK, I admit that I haven't had time to do more than peruse this article, pick up some facts and opinions and begin to mull them over, but you go ahead and read it and let me know what you think:

http://www.fastweb.com/financial-aid/articles/1447-would-forgiving-student-loans-stimulate-the-economy

You might need to be registered at the site to get it. If so, here are some numbers to chew on:

  • There’s about $598 billion of federal education loans outstanding and about $132 billion of private student loans outstanding, a total of about $730 billion.
  • Only borrowers in active repayment and who are current on their loans would derive a cash flow benefit from loan forgiveness. While borrowers who are in a deferment or forbearance, delinquent or in default might derive a financial benefit from having their debt canceled, such forgiveness would not translate into increased consumer spending.

    • About half of all private student loans are in repayment, and of those, about one-fifth are either delinquent or in a forbearance. So only about 40% of outstanding private student loans are in active repayment and current.
    • Nearly 60% of federal education loans are in repayment, and of those, about a third are either delinquent or in a deferment or forbearance. So only about 40% of outstanding federal education loans are in active repayment and current.
    • 40% of $730 billion is $292 billion.
  • Most borrowers of federal education loans consolidate their loans to obtain an extended repayment, typically with a term of 20 years. Most private student loans also have a repayment term of 20 years. Assume an average interest rate of 7.0% on federal education loans and 11% on private student loans. Then the current annual payments on the education debt that is in active repayment total about $28.8 billion, 9.9% of the debt in active repayment and 3.9% of the $730 billion in outstanding debt.
The gist of the article, that I get so far, is that no, forgiving student loan debt would not stimulate the economy. Well, I see some contradicting "facts" in there, so I'll go back and read further when I get a chance, but in the meantime: can forgiving some student loan debt hurt?

That's my question. I already know the answer. NO.