Michigan State University Professor Scott Imberman answers questions about the Supreme Court’s decision to strike down student loan forgiveness. He shares appointments in the Department of Economics and the education policy doctoral program and has been published in outlets such as the American Economic Review, the Review of Economics and Statistics, and Education Finance and Policy.
What are some immediate and long-term economic impacts of the Supreme Court’s decision?
In the short run, people who might have expected forgiveness will now have to begin making repayments in September when the current pandemic deferrals expire. This will take spending out of the economy, potentially reducing growth somewhat while also reducing inflation pressures. In the long run, we might expect people who struggled to repay their loans prior to the deferrals to once again have difficulty repaying and thus defaults would increase.
If the court decision had passed, where would the funds have come from?
The funds in this sense would not have really come from anywhere since it was “paper money.” The funds themselves were already disbursed when the borrowers attended school. Instead, now future revenues to the government in the form of expected loan repayments will be lower. The impacts will be relatively smaller in the short run as many people will have remaining debts to pay, but in the long run, it will generate a pretty substantial hole in the budget.
Can student loan forgiveness stimulate economic growth or hinder it in the long run?
It depends on how people and the government respond to the loan forgiveness. The forgiveness could induce people to invest in long-term durable spending that could appreciate (like housing) or increase productivity (starting a new business or buying a car to get to work), which would generate long-term growth. If it's spent on immediate goods or saved, then the benefits to growth would probably be short-lived. Also in the long run, it depends on how the federal government offsets the lost revenue. In the end, it is unclear if higher consumer spending will offset the lost revenues in the federal budget.
What’s next with student loan forgiveness?
The Biden administration has not said what their plans are, though some people outside the administration have alluded to other authorities the president may have. Any congressional legislation is a non-starter with the current congress, and so it is unclear what will happen next. However, for new borrowers there is also a revised income determined repayment, or IDR, plan put out by the administration that is much more generous than previous plans and authorized under a different authority. This plan would make the need for forgiveness much lower for new borrowers, but I would expect that it too would be subject to litigation.