Forgiving Student Loans: Fair and Economically Savvy or Regressive and Fiscally Irresponsible ?

Student debt in the United States is out of control.

44.7 million borrowers owe a whopping total of $1.68 trillion, which is 100% higher than 10 years ago. This staggering growth rate outpaces tuition increases by 353.8%, and the average debt is $37,584 per borrower.  (Click HERE for the data)

Student debt forgiveness has become a front and center conversation with the new Biden administration.

On one side, this is a great way stimulate the economy. Just a simple swipe of the pen can immediately relieve the financial burden on millions of Americans who will now go out and buy homes, cars, etc.  No messy senate debates, no months upon months of waiting for relief.

On the other side, relieving student debt isn’t an effective way to stimulate the economy.  Student loan repayments are spread out over 5, 10, 15+ years. The stimulus effect won’t be immediate because it will only lessen debt by $393 (on average) a month per borrower, and it will favor people in higher income brackets.

Who’s Right?

Fairness is a word thrown around by both sides, but the concept of “fair” is in the eye of the beholder. With hundreds of billions of dollars on the line, emotions and “fairness” shouldn’t dictate policy decisions.

What Do the Numbers Say?

Note: Synthesizing the research and numbers regarding the economic impact of debt forgiveness is worthy of a PhD thesis. I’ve picked the most cited pieces of research for the following section.

Note #2: The following two sections are dense with data. If you are short on time, read the key takeaways and skip down to the conclusion. But remember, emotion shouldn’t dictate policy. Understanding the research and available data is essential for having an informed opinion, and I strongly encourage you to dive in.

Pro Debt Forgiveness:

The Key Takeaways:

• College debt is holding people back from purchasing a home, and relieving that debt may boost the housing market.
• Debt cancellation will give way to more consumerism, which would lead to an increase in real GDP by $86-$108 billion a year.
• Partial debt forgiveness of $10K-$50K would give Black borrowers more relative wealth which would be game changer for Black communities.

The Research:

It will stimulate the housing market

• Surveys indicate that student debt is playing a large role in delaying entry into to housing market. In THIS survey by SoFi, 61% of respondents said that student debt is preventing them from buying a home while THIS survey from the National Association of Realtors (NAR) found the number to be 76% of respondents. Forgiving student debt will give these people the chance to acquire a valuable asset via buy a home, which will boost the economy.
• (NOTE: Take a look at the data behind the statistics above. The SoFi survey was completed by 2,203 student loan borrowers which is a 2.4% response rate. The NAR report has data from an extremely skewed demographics with quite pronounced biases throughout. However, both are cited throughout other pieces of research, which is why they are included here.)

It will boost the economy

• The Macroeconomic Effects of Student Debt Cancellation is a pivotal piece of research in the conversation (click HERE). The researchers found that debt cancellation could boost real GDP by $86-$108 billion a year, reduce unemployment rates by .22-.36% over 10 years, and add 1.2-1.5 million new jobs for first few years following the forgiveness. The research suggests that the inflationary effect would be insignificant, the net budget effect for the federal government would only modestly increase, and state budget deficits would improve.
• Forgiving student debt will also stimulate over all consumerism. THIS 2017 survey from NAR (mentioned above) found that student debt prevents individuals from taking vacations (72%), buying a car (65%), continuing education (64%), and starting a small business (40%). (A kind reminder…. look at the data.)

It will specifically help Black communities

• In Student Debt Forgiveness Options: Implications for Policy and Racial Equality (click HERE) the researchers look into how student debt forgiveness can help close the racial income gap by helping Black households. The findings suggest that full debt forgiveness will unequally favor the rich. Partial debt forgiveness from 10K-50K would give white borrowers more  dollar wealth, but would give Black borrowers more relative wealth, which would be game changer for Black communities.

Anti-Debt Forgiveness

The Key Takeaways:

• Student debt and income are directly related, meaning that higher income earners have accrued the majority total student debt. Thus, student loan forgiveness disproportionately favors the wealthy and further drives income inequality.
• Student loan forgiveness will do very little to help the economy. Loan repayment plans are over a timespan of 5, 10, 15+ years.  Debt forgiveness doesn’t put a lump sump of cash to spend in American’s pocket. It simply lowers expenses by around $400 a month. 
• A moral hazard problem could arise as future generations take on riskier behavior in anticipation of the same debt forgiveness.

The Research:

Total student debt forgiveness will disproportionately help high income earners with good jobs

The majority of total student debt is held by people with graduate degrees, and the amount of student debt you have is directly related to income. The more you owe, the more you earn. (To my artist friends with a boat load of debt and a low income… sorry, you’re an outlier from the data).

For example, the average debt from dental school is $292,169, the average debt from medical school is $201,490, and the average debt from law school is $145,550 (click HERE for the source). Graduates in these fields expect to make a 6 digit salary, and rationally choose to take on said debt.

While just 7% of students owe over $100,000, that accounts for 37% of total student debt (click HERE). Letting the nation’s higher earners off the hook who knowingly took on this debt for the big salary doesn’t make a whole lot of sense.

But what about partial debt forgiveness?

• The Distributional Effects of Student Loan Forgiveness (click HERE) shows the relationship between debt and income, and the models indicate that both full and partial forgiveness will favor the rich. “We find that universal and capped forgiveness policies are highly regressive, with the vast majority of benefits accruing to high-income individuals.” The researchers suggest that Income-Driven Repayment plans are a much more effective way to  help those who need it most.

“Under current IDR plans, borrowers pay 10 or 15 percent of their discretionary income, above 150 percent of the poverty line. After 20 or 25 years, remaining balances are forgiven. IDR plans thus have a significant forgiveness component, but unlike more general forgiveness options, IDR targets forgiveness towards lower income borrowers.”

The paper is a bit dense, click HERE for  a more digestible summary. However, give it a look, give the papers from NAR and SoFi a look, and compare the level of analysis that went into each.)

Relieving student debt will do very little to boost the economy compared to other stimulus packages

• The Committee for a Responsible Federal Budget released a paper (click HERE) finding that forgiving total student debt will boost cash flow by $90 billion a year while boosting current economic output by $115-$360 billion (the paper in Pro-debt forgiveness side had similar numbers, but a positive interpretation) . 75% of these repayments would go to the top 40% of earners. Canceling interest and continuing to defer loan repayments will have a much  greater economic benefit without the high price tag.
• The paper explains that the benefits are so low because debt forgiveness is a slow drip form of stimulus. Loan repayment plans are over 5, 10, 15+ years.  Debt forgiveness doesn’t put a lump sump of cash to spend in American’s pockets. It simply lowers expenses by an average of $400 a month. 
•  Under tax laws, borrowers would need to pay taxes on the debt forgiveness, which would potentially negate any positive stimulus.

Even partial loan forgiveness would do very little to  help the economy

• A report from Goldman Sacks (click here) found that providing 10K in forgiveness would add less than .1% to the nation’s GDP for 2021-2030  while the cost would be $300 billion, which is 1.6%  GDP

It could create a moral hazard problem

Forgiving student debt doesn’t teach anyone a lesson. It rewards those who borrowed beyond their means while kicking the shins of those who made sacrifices to payoff/avoid debit. It also could could create a moral hazard problem for future generations.

“Moral hazard occurs when there’s an implicit or explicit promise that someone else will bear the cost of your decisions.” This means that if you have the expectation that you’ll be bailed out, you’ll take on more risky behaviors (i.e Debt). In THIS Forbes article, Preston Cooper compares it to the risky behavior of banks leading up to the financial crisis of 2008 as well the tendency of developers to build homes in high flood risk areas due to publicly subsidized flood insurance.

If the costs of tuition continue at these same levels or rise, this bail out will signal to future grads that they too might get the same treatment, encouraging students to choose private, pricey colleges over cheaper alternatives. If expectations are met and future students do get bailed out, that price tag will negate any economic gains from the first round of loan forgiveness.

What can we conclude?

First things first, macroeconomic issues are challenging to tackle. Human behavior and decision making is impacted by countless, constantly changing factors. It’s hard to make predictions as to how the stimulus of loan forgiveness would actually be used. Perhaps, people will go out and by homes. Or maybe they won’t. Words don’t always translate to action.

Given the available research and data, here is what we can conclude:

Total debt forgiveness is a poor economic policy because it gives massive aid to those who don’t need it. A partial loan forgiveness of $10K would wipe out total debt for 16 million people while having a much lower price tag (click HERE). However, it would still have a minimal impact on the economy. Any stimulus effect will be slow drip over the course of many years, and there is strong evidence to suggest that other forms of stimulus will provide a much greater bang for your buck. The housing market and consumerism could be stimulated, but the data is weak, and the topic needs further analysis. It could aid Black households, but the research suggest white households will ultimately benefit more.

My Two Cents…

As a young, bright-eyed college freshman, I’ll never forget the first principle I learned in my first microeconomics class: TANSTAFL

There ain’t no such thing as a free lunch.

Among peers, I see a common type of argument in regards to this debate.

Peer 1: Cancel student debt!!!!! It’s only fair!

Peer 2: I worked hard to pay off my debt, student loans shouldn’t be forgiven.

Peer 1: Congrats, happy for you! But then this doesn’t affect you.

Me: EXCUSE ME?

MONEY ISN’T FREE. The cost of forgiving student debt will need to be covered via budget cuts elsewhere or an increase in taxes. Every single government program, benefit, and service has a price tag that someone somewhere will be paying for (Hint: it’s probably our kids.) It’s nice to romanticize about the rich covering the bill. Elon Musk and Jeff Besos, certainly could give a lending hand. But that’s not how our current tax system works.

Because “there ain’t no such thing as a free lunch,” wisely choosing policies and programs that produce the maximum results for the lowest price tag should be the focus; weighing up the costs to the benefits is essential and the fiscally responsible approach. Sure, forgiving student debt will have some effect on the economy. But will it be as powerful as small business loans, better unemployment benefits, and local aid? The data suggests the answer is no. In 2020, the US (aka taxpayers) had to pay out $376 billion on the interest rate of the national debt alone (click HERE). Is it wise to take on policy decisions that will only cause that bill to rise?

Has college gotten outrageously expensive? Yes. But was the decision to attend said expensive college a choice? Yes. You could splurge on that $3,000 designer handbag, or you could settle for the $20 one. You could have also chosen to attend a community college instead of a pricey private school. There are resources explaining what salary you can expect to make for a specific major, and it’s no secret that liberal arts majors (history, literature, dance, music etc) don’t lead to the big bucks. Perhaps, you felt duped and tricked into attending an expensive college. But it’s not so different than marketing agencies using specific phycological techniques to get you to feel like you “need” that $75K car or that new $1,500 iPhone, resulting in credit card debt. Despite marketing ploys, there is a still a big price tag on that shiny new Tesla and the information about the cost of college is available.

Only 13.5% of Americans hold student debt. Expecting the other 86.5% who actively made choices to pay off/not have student debt to foot the bill is socially irresponsible.

One more point, the argument that partial debt would help Black communities is weaker and more expensive then other solutions. This is an entire PhD thesis in of itself, but prison reform and police reform are just two examples of much more productive routes.

While student loan forgiveness seems progressive, after digging into the data, it becomes apparently that it’s socially irresponsible and highly regressive. Nothing is free; someone always pays the bill.  It should be the ones who ran up the tab in the first place.