Posted by: Josh Lehner | August 24, 2022

In The News: Student Loans

This post is updated 9/23/22 with more information, and includes a copy of the slides Mark used during his testimony to the House Interim Committee on Education.

It is now official. The Federal Government is set to cancel $10,000 in federal student loans per borrower, with some income restrictions, and additional forgiveness for Pell Grant recipients. This is a topic that has come up in some of our forecast advisory meetings in recent quarters. We still do not have all the specifics, but recent information and analyses gives us a pretty good idea of how this will impact Oregon.

First, it’s been nearly a decade, but our office did dig into the student debt issue in Oregon previously, discussing trends, economic outcomes, and default rates across different types of institutions in Oregon. All of that holds up pretty well today looking back.

Since then, student loan debt has continued to increase but at a slower pace, or at a rate roughly equal to economic growth. Measured as a share of income, student loan debt in Oregon has been steady for the past 8 years or so. Of course this is in part a combination of people paying down their loans, underlying income growth which is important in terms of borrower’s ability to pay, and flat to declining enrollments in higher education which means relatively less new debt entering into the system. As far as new students who do take out loans, debt per student has not declined as far as I can tell, but continues to inch upward at about the pace of inflation in the past decade.

Note that this data is about student loan debt for all Oregon residents and is not specifically related to Oregon-based colleges and universities.

In terms of the forgiveness piece, I think there is a clear difference between the micro and macro view. At the micro level, there will likely be a real impact. New estimates from the White House find that 499,000 Oregonians are eligible for loan forgiveness, including 322,000 with Pell Grants which are eligible for the larger amount. Here’s what our office wrote back in 2017 when we last looked into student loans in more depth.

[T]he biggest student loan issues are those who do not graduate or who graduate from a program that does not actually provide skills valued by employers. Such individuals generally have relatively low levels of debt, ranging from a couple thousand dollars up to maybe $10,000 or $20,000. The issue is such individuals are not able to land a job that can allow them to pay off these loans.

During the pandemic, as the Federal Government has deferred student loan payments, at least on federal loans, the BEA has estimated this impact at about $38 billion annually in terms of less consumer spending on the interest on the loans due to the deferrals. Research from the Federal Reserve Bank of New York finds that during the pandemic, only about 1 in 5 borrowers opted back in and kept making payments, while 4 in 5 took the deferrals and did not make payments. If we take the BEA estimate and share it down to Oregon, the result is Oregonians have been paying about $500 million less on an annual basis since the deferrals began. That works out to roughly $1.2 billion cumulatively since the start of the pandemic through today.

So while this change in federal policy can have a big impact at the individual level, from a macro perspective these figures are relatively small. IHS Markit estimates impacts on inflation and GDP to be a few hundredths of a percent. The total amount of student loan debt cancellation is somewhat harder to pin down as there are multiple pieces to it. In total, combining the outright forgiveness with changes in repayment plans and the like it looks like in Oregon it will be around $7 billion. Our previous estimate was $4 billion, which could be more of the outright forgiveness part (will update as we learn more). Whether borrowers choose to spend this improvement in their household budgets immediately, or to lever up on new types of debt in the coming months is still to be determined. To the extent that this does happen, it could contribute further to the overloaded supply chains and inflation situation, albeit on a very modest basis. But we also know that payments on the non-forgiven portions of loans will restart at the beginning on 2023 which will be another situation where the micro impact — increased debt payments every month for the 4 in 5 borrowers who took the deferral — differs from the macro impact — a tenth of a percent impact on any shift in consumer spending between different categories is hard to notice.

Finally, our office has updated two slides looking at loans and default rates across counties in Oregon based on new Urban Institute data. Most counties in the state have roughly average shares of residents who have student loans and average default rates on those loans, when compared with all counties nationwide. That said, urban areas do tend to have higher shares of residents with loans — keep in mind one of the dominant migration patterns the last two decades has been for recent college grads to move to large metro areas — but not correspondingly high default rates pointing toward high incomes and ability to pay the loans. When it comes to default rates, something we discovered a decade ago in our work, is that local economic opportunities matter. Default rates are higher in counties where unemployment is higher.


Responses

  1. Would forgiveness of student debt equate to taxable income to the student?


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