The Secret Price of Student Debt Shows Why We Need A Student Debt Stimulus for Everyone
By Mike Pierce | May 22, 2020
In recent weeks, as the coronavirus pandemic emerged as an existential threat to the American economy, Congress debated a wide range of policies to respond to the escalating crisis. Many of these proposals have included some amount of student debt cancellation — a sign of hope for 45 million Americans trapped in a badly broken student loan system.
New evidence underscores the importance of broad-based student debt cancellation in reducing the economic drag this debt imposes on American families’ financial lives. This is more important than ever if we are trying to get our economy back on track.
In contrast, efforts to “target” debt cancellation are bad public policy. When lawmakers attempt to judge who does and does not deserve help, the result is likely to fail as an economic response to the pandemic. Such a response also fundamentally misunderstands the burden student debt imposes on families and on the economy.
The truth: student debt makes it harder for all borrowers—especially those from historically disadvantaged communities—to build wealth.
As a result, student debt widens inequality and creates an unnecessary drag on our depressed economy at the very moment when our families, our communities, and our country can least afford it.
New research released by the Student Borrower Protection Center and Credit Builders Alliance illustrates this point, revealing the secret price Americans with student debt are forced to pay even if they have never missed a student loan payment.
Our new research finds that:
- A typical borrower could pay $29,000 in extra charges on other forms of credit through increased interest rates. An individual with a high student debt burden could pay as much as $29,000 more in total over the repayment term for a typical auto loan, mortgage, and credit card compared to the same borrower with a lower level of student debt stress. A borrower with a moderate student debt burden would pay more than $11,000 in extra charges for the same package of credit products.
- A borrower experiencing financial strain during the pandemic shoulders an even bigger added cost. Research shows that families rely on credit card debt to weather economic shocks, including job losses and unexpected bills. Compared to a typical borrower with a high student debt burden, a borrower experiencing financial strain who is also shouldering a high student debt burden would pay hundreds of dollars more in credit card interest charges alone, making it harder to cover basic needs. As the pandemic drives unprecedented levels of unemployment, an individual with a high student debt burden could pay tens of thousands of dollars in additional charges compared to the same borrower with a lower level of student debt stress.
- A borrower with lower credit use could still pay more than $13,000 in extra charges. A borrower with lower-than-average auto, mortgage, and credit card debt but a high level of student debt stress could still pay $13,000 more across this bundle of credit products than the same borrower with a low student debt burden.
- Vulnerable borrowers pay the biggest price on other credit products for their student loan debt. Hidden costs are greatest for borrowers forced to take on bigger student debt burdens — leaving low-income borrowers, women, and borrowers of color to pay the biggest price across their financial lives. In addition, public service workers, like teachers or social workers, are also at higher risk of being hit with greater hidden costs due to their high debt burden in relation to their income. Further, this secret price may contribute to widening economic and racial inequality, as borrowers are less able to build wealth.
These findings make a clear case for lawmakers to do more to help end the student debt crisis, contributing to a robust body of research that shows how student debt harms vulnerable people and suppresses economic growth.
Recent research also shows that cancelling student debt has immediate, measurable benefits for borrowers’ financial and employment prospects. For example, a study authored last year by Harvard Business School Professor Marco Di Maggo and co-authors finds that borrowers who had student debts cancelled “reduce…[other] indebtedness by 11%, and number of other delinquent accounts by 24%.” After debt cancellation, the authors “see increases in the borrowers’ geographical mobility, probability of changing jobs, and ultimately their income, which increases by about $3000 over a three year period.”
Taken together, findings from recent studies, including our own, make it clear that lawmakers must seize the present opportunity to end the student debt crisis. If nothing changes, borrowers will lose out on tens of thousands of dollars in additional wealth — and our economy will lose out on billions in economic activity — guaranteeing that a student debt crisis for some remains an economic crisis for us all.
Mike Pierce is the Policy Director and Managing Counsel at the Student Borrower Protection Center. He is an attorney, advocate, and former senior regulator who joined SBPC after more than a decade fighting for student loan borrowers’ rights on Capitol Hill and at the Consumer Financial Protection Bureau.