Student debt forgiveness—or cancellation—has become a popular policy proposal. First, it was a major discussion in the 2020 Democratic presidential primary. Now, it has become one of the big focal points of the debates around the coronavirus relief and stimulus packages.
Many have pitched the policy as a way to stimulate the economy, especially now that the country is in a recession. However, experts have diverging viewpoints on whether or not student debt forgiveness is an effective way to help the economy.
Here’s what they say.
Proponents of student debt cancellation:
When Senator Elizabeth Warren (D-MA) proposed student debt cancellation as part of her presidential campaign, she had a group of experts at Brandeis University analyze her proposal. They concluded her plan would help boost the economy through “consumer-driven economic stimulus, improved credit scores, greater home-buying rates and housing stability, higher college completion rates, and greater business formation.”
Another group of experts concluded that, “Student debt cancellation results in positive macroeconomic feedback effects as average households’ net worth and disposable income increase, driving new consumption and investment spending.” Among the effects they found, they estimate that a one-time debt cancellation of all student loans would boost real GDP by at least $86 billion a year and reduce the average unemployment rate over a ten-year period.
Moody’s Investors Services estimated that broad student loan forgiveness would “yield a tax-cut-like stimulus to economic activity, contributing to a modest increase in household consumption and investment.”
Opponents of student debt cancellation:
Those who don’t support student debt cancellation push back on the notion that it is an effective way to stimulate the economy. Even the Moody’s analyst cautioned that it could be counterproductive. While it has a modest impact on the economy broadly, it could increase the risk of moral hazard where borrowers could be encouraged to take on more student debt.
Last week, analysts with the Urban Institute wrote that student loan forgiveness wouldn’t be the best way to provide stimulus during the pandemic because most of the savings to borrowers would be realized over time. Pointing specifically to the proposal to cancel $10,000 for each borrower, they said that forgiving that much would free up just $100 for the average borrower over the next decade.
Because many borrowers make payments under income-driven repayment plans, they said that borrowers’ payments may not change if their balance is reduced. Those borrowers would see the benefit later by paying their balance off sooner. Instead, the experts said that Congress should extend the CARES Act repayment suspension to free up cash for borrowers in the economic downturn.
Additionally, they argued that stimulus checks are more effective and universal, because 90% of Americans received those checks whether or not they have student loans. Less than a quarter of Americans have student debt.