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Will Student Debt Forgiveness Stimulate The Economy?

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The American economy has been throttled since the coronavirus pandemic swept across the country. States have started to reopen, but high unemployment numbers continue to roll in weekly. Congress is considering another round of stimulus checks and contemplating other options. One suggestion is student debt cancellation.

But is that the best way to stimulate the economy?

Late last year, before any votes were cast in the Democratic presidential primary, student debt cancellation was one of the biggest issues discussed among candidates and Democratic voters. Senators Bernie Sanders and Elizabeth Warren both proposed broad student debt cancellation plans in their campaigns.

Many proponents of those plans mentioned the economic effects of such massive loan forgiveness, pointing to studies that showed a stimulus effect. That effect is sometimes disputed. Even studies that point to positive effects show other negative impacts on the economy.

When Congress considered coronavirus relief packages in the spring, many proposed student loan cancellation to provide relief. And some argued it would provide a stimulus. The CARES Act is eventually what passed and while it didn’t cancel student debt, it did suspend payments for approximately six months.

Now, as some lawmakers are hoping to prime the pump and get the economy back up and moving, some are saying that student debt forgiveness is the way to do it. Of course, anytime the government invests massive amounts of money, there is likely to be some type of positive effect in spending.

But debt forgiveness supporters and policymakers should ask if that is the best way to stimulate the economy. They should also think about who it helps the most, especially given who is being hit the hardest in the pandemic.

About 45.1 million Americans have student loans and half of them are under the age of 35. But that’s less than 15% of the population. Providing $10,000 per student in debt cancellation as proposed this spring would cost nearly $400 billion. And that would disproportionately benefit higher-income families more than lower-income households.

For that amount of money, we could send another round of stimulus checks to American families and still have money left over. In fact, there would be enough money left to double what the country spends annually on the Supplemental Nutrition Assistance Program (SNAP), better known as food stamps.

That would likely help stimulate the economy, or at least prevent its further retraction. And it would help to ensure that struggling Americans get money in their pockets and food on the table.

And Congress could still adopt the HEROES Act proposal for student loans which would suspend payments for another year and cancel $10,000 for the most distressed borrowers. That would relieve those borrowers struggling the most, while providing short-term relief for all borrowers.

Freeing up that cash might also provide a similar stimulative effect in the short run compared to cancelling the debt for all student borrrowers.

Of course, if Congress were willing to continue to fund trillions of dollars in stimulus packages, many programs could be funded. But money is finite, and Congress should try to address the needs of those who are hit the hardest by the pandemic and help the most Americans. Student debt cancellation is likely a better use of funds that some corporate bailouts, but the focus should first be those that are hurting from the pandemic and those who were struggling before it hit.


Related Readings:

What The Coronavirus Stimulus Means For You Student Loans

The CARES Act Helps Most Student Borrowers Seeking Loan Forgiveness

Will Mitch McConnell Agree To More Student Loan Stimulus?


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