VERMILLION, S.D. (KELO) — Millions of Americans have $10,000 less in student loan debt following an executive order from President Joe Biden on Wednesday.
For students at the University of South Dakota, there’s some excitement in the air and it’s not just because the semester is starting.
“Excitement and relief a little bit,” Marketing and media student Gerriet Gayken said. “Just nice to have a little extra time to make more money and just like, kind of suppress the blow of student loans.”
For Mackenzie Mencke and Maddie Harris, the announcement feels like a weight lifted off their shoulders.
“I don’t get much financial aid, because my household technically makes too much money,” Mencke explained. “But they also don’t put into consideration, like, how many kids are in the house? How many bills have to be paid?”
Both Mencke and Harris are planning to become teachers and with that comes the recognition that they may not be making much money once they finish school. Biden’s executive order is easing some of their worries about how they’ll pay off their loans
“I mean, $10,000 is a lot. So, any amount you can get off, I think it’s helpful, especially because teaching is more for like, you know, doing good for people rather than like the pay,” Harris said.
How will forgiveness impact inflation?
Despite excitement from borrowers, many Americans are worried about what the forgiveness means for taxpayers and rising inflation.
U.S. Representative Dusty Johnson has been a strong opponent against student loan forgiveness going so far as to call it a “bad policy.”
“70% of this giveaway goes to the richest 60% of Americans is not going to do anything to long term bring down the cost of college. In fact, it’ll probably make it worse,” Johnson told KELOLAND News Wednesday afternoon. “And we also know that most economists, not everybody, but most economists suggest that this is going to make inflation worse, how could it not, you put $300 billion of new money out on the street, that’s going to have an impact.”
According to the U.S. Department of Education Analysis, the 87% of borrowers who will have debts canceled make less than $75,000 annually.
Kathryn Birkeland, Associate Dean and professor at the University of South Dakota Beacom School of Business, said that inflation can be made worse the more people spend. Typically, a stimulus would put more money into the economy making the rising prices trend upward.
But would student loan debt do the same? It’s hard to say, Birkeland said.
“If we have a stimulus, the idea of a stimulus is it student loan forgiveness is essentially the same type is to stimulate spending, it will move in the opposite direction,” Birkeland said.
As the $10,000 forgiveness isn’t directly putting cash into the hands of borrowers, but rather relieving them of some of their debt, Birkeland said the impact on inflation is undetermined at this time.
“And so it’s not clear that having those loans forgiven is going to get them a whole lot of extra income every month if they’re making the minimum payments. For some people that’s only, you know, $75 or $100 on their student loan every month; that might not be enough to cause a large stimulus that would cause an inflation problem. But it is something that could happen, we certainly could see that there is more demand for goods and services. That could have a problematic effect on inflation,” Birkeland said.
Student loans have been paused since March of 2020 and not everyone has been paying on them during the freeze. Today, Biden announced that the freeze would extend until the end of 2022.
For households that haven’t made payments on their frozen loans, Birkeland said that once the loans start up again, they may be able to make smaller payments or have no payment at all depending on how much debt they had.
“It’s not necessarily going to change right now that they’re going to run out and spend lots of money. It’s not like putting $1,200 in their checking account today, that will cause them to want to spend more,” Birkeland said.
Who pays for debt forgiveness?
Another common concern among Americans right now is where the money is coming from to forgive the loans. Does it create a burden on taxpayers? Especially those who never had student loan debt or have already paid off their loans?
Birkeland explained that the loans are funded by the Department of Education, through the United States Treasury. That money is then paid to the university.
“So, then there is essentially a promissory note, the student promises to repay to the Department of Education. As the students repay that, money then is recycled to new students who are taking out loans. If we have students who are taking out loans and the money doesn’t get repaid, we would need to have more funding from the Treasury,” Birkeland said.
That kind of funding through the treasury is the same as any other project that is paid for by the federal government through taxpayer money, according to Birkeland.
“And we all have lots of opinions about what we think the best way in which the federal government could spend their money. And so yes, we would expect that people are concerned about student loan forgiveness, the same way that they’re concerned about defense spending the same way that they’re concerned about spending for the EPA, or any of those other issues,” Birkeland said.
Johnson views the forgiveness as a “slap in the face” to Americans who have already paid their loans off.
“Try to remember when you go to sleep tonight, that most Americans don’t go to college. Most Americans don’t have student loan debt. And yet most Americans are going to have to pay for this giveaway from Joe Biden,” Johnson said.
The rising cost of higher education
At the root of the student loan forgiveness, conversation is the cost of higher education.
The CollegeBoard and U.S. Department of Education have reported that the cost of four-year tuition has almost tripled since 1980.
Birkeland said that like most costs, the price of higher education has increased over the years.
“For higher education, there’s called the higher education price index. And so it looks at the same sort of idea of if you were to buy the same, you know, degree program every year, how much would that cost you on average across the US, and it does rise a little bit faster than consumer goods,” Birkeland said.
The rise of wages also must be taken into consideration to determine whether wages are increasing at the same right at the cost of higher education.
“It’s widely believed that it’s not the same rate. Higher education is getting more expensive, faster than wages are rising,” Birkeland said.
There are two reasons for that, according to Birkeland.
First, the demand for workers with a college degree is increasing. That means that for universities to provide the resources and benefits, the cost is higher and so the cost of the degree is also higher. More technology is on campus, Birkeland pointed out.
The “college wage premium” is also positive, according to Birkeland. That means that the benefits of a college education translate to rising incomes after graduation.
“So, even though we see more people going to college, and even though we see a higher cost of going to college, it’s still beneficial in that lifetime earnings for someone to do so for most occupations,” Birkeland said.
Birkeland said that student loan forgiveness isn’t about short-term policy goals, but rather long-term benefits to students.
“So, when we think about, you know, fiscal policy, it takes a while for those policies to impact and, and sort of, they’re designed to change what we call sort of our long-run average, or sort of like, our sustainable way that our economy functions,” Birkeland explained.
That means that if labor and factories are producing at a normal rate, the production is sustainable. But making it easier to go to college through training and skills, changes how much can be produced in the long run.
“Adding to your ability to produce, it’s adding human capital making that easier to acquire,” Birkeland said. “So, that is sort of trying to target the long run productive capacity of the economy, not sort of the ups and downs that we see in the short run.
While Johnson is vehemently opposed to the cancellation, he is a proponent of addressing the cost of education and access to college.
“I’ve been on record for a long time about the importance of restoring some of the purchasing power of the Pell Grant. Now that’s targeted, I mean, that actually goes to the lowest income Americans makes it easier for them to go to school, that is a program that would get more poor people to college and improve this country,” Johnson said.
Through Biden’s executive order, Pell Grant recipients will be able to receive up to $20,000 in student loan forgiveness.
During a town hall on Wednesday, a constituent expressed concern to South Dakota’s lone representative saying that their college-aged children received very little loan counseling before taking on massive amounts of debt to attend university.
Johnson agreed that specific policies that target loan counseling might be more beneficial for students.
“I mean, you’re right. Kids are making big decisions without the kind of counseling that I do think they should have access to. Then let’s make a governmental investment in counseling at the high school level for these decisions,” Johnson replied to the mans concerns. “You know, how many good counselors we could hire for $300 billion?”
Some proponents of student loan forgiveness have argued that it is hypocritical of the federal government to forgive Paycheck Protection Program loans taken out during the COVID-19 pandemic while leaving student loan debt untouched. To that, Johnson would say they don’t know what they’re talking about.
“The PPP loan was not about employers, they were required to spend that money on employees that went to workers, who otherwise in many cases would have been laid off because that’s what happens during recessions. Millions of Americans lose their job, at their jobs. Sometimes they lose their cars, sometimes they lose their homes,” Johnson explained.
Johnson went on to say that the argument that the PPP forgiveness is a “big giveaway to corporations” is coming from those that are “ignorant of the facts.”