What if the United States decided to cancel all student debt?

What would happen if the United States decided to cancel all student debt?

A Bard College economics research team (Scott Fullwiler, Stephanie Kelton, Catherine Ruetschlin, and Marshall Steinbaum) decided to explore what such a bold near-term future could look like in “The  Macroeconomic Effects of Student Debt Cancellation” (pdf).  Their research is detailed, relying on several powerful macroeconomic models and a good amount of data.

The tl;dr result?  It’s a good idea for the country, for debtholders and non- alike.  “Student debt cancellation results in positive macroeconomic feedback effects as average households’ net worth and disposable income increase, driving new consumption and investment spending.”  They find other, noneconomic benefits as well.

Let’s break things down.

First, why would America do such a thing?  For some of us this is an obviously bright idea, but the authors do a good job of summing up the debt crisis and its problems, concluding that “the current policy of encouraging the expansion of debt-financed higher education has been a failure, and therefore a radical departure is in order.”

Second, how might it play out?

The researchers rely on two well known economic simulations, one developed by Moody’s (the U.S. Macro Forecast Model) and another generated by Yale economist Ray Fair, including the Fair-Parke app.  Both of these are new to me, and pretty fascinating.  The authors ran different simulations based on varied inputs and responses, such as taking into account how the federal Reserve might react.

Running these sims for a ten year timeline, the team found that the economy would receive a beneficial shot from freed-up money in the hands of today’s borrowers.

the income that households would have devoted to servicing their loans is now available for households to spend, save, or borrow against… [and] borrowers currently servicing student loans will feel as if their net wealth has increased…

The key result would likely be economic growth: “The most likely range for the total increase in real GDP (in 2016 dollars) is estimated to be between $861 billion and $1,083 billion for the entire 10-year period (or $86 billion to $108 billion per year, on average).”

Debt Cancellation: GDP rise

(Note the grey bars pointing down for the last few years.  The authors don’t think that’s likely. See below.)

Alongside helping GDP, debt cancellation would help reduce unemployment a little. “Unemployment rates could fall by about 0.22 to 0.36 percent- age points on average over the entire period [ten years].“  Indeed, “[p]eak job creation in the first few years following the elimination of student loan debt adds roughly 1.2 million to 1.5 million new jobs per year.”

There would be some costs, although the authors are sanguine about them.  Inflation could tick upwards, but “[i]nflationary effects appear to be small and macroeconomically insignificant. “  Interest rates might nudge up, or not: “Interest rates rise modestly, if at all.”

More significantly, the federal government would have to spend to address the cancellations, meaning a boost to the deficit and debt: “the deficit effects include increased [federal] government debt service.”   However, “[t]he cancellation’s impact on the federal government’s budget is, on average, modest, with a de cit impact of 0.65 to 0.75 percent of GDP”.  On top of that, American state governments would actually see their financial situations improve, due to the overall improvement in the general economy: “the debt cancellation leads budget positions to improve at the state level as a result of the stronger macroeconomy”.   In fact, “the improvement in state budgets offset by about one- fifth the net [federal] budgetary effects”.

Debt Cancellation: state budgets

The report goes on to generate some “additional benefits of student debt cancellation” that Moody’s and Fair don’t display, “from increases in business formation, college attainment, household formation, and credit scores, to reduced economic vulnerability for some households.”

Here’s a key detail.  The authors don’t posit harm to the private financial sector.  Instead, their assumption is that “student debt cancellation…[means]  the federal government either purchases and cancels or takes over the payments for privately owned loans.”

The paper also addresses a number of issues and concerns, including the problem of such a cancellation being regressive (wealthy people tend to own a bit more debt than do the poor), the changing nature of borrowers (now more likely to be adults), the limits of models, and so on.

There are plenty of caveats here.  The preexisting models can’t really simulate effects by age, gender, or class (“the simulated macroeconomic impacts for both models are ‘general’ or ‘average’ in the sense that they assume that the increase in net wealth and reduced debt service benefits the entire household sector, not specific components of the household sector”).  The simulations disagree with each other, Fair being more optimistic than Moody’s.  And there isn’t any political analysis here about how such a program might be implemented, or the likelihood thereof, which we can discuss.

I leave this report with two questions.  First, is the modeling correct or unrealistic?  Second, if it’s reasonably accurate… why shouldn’t we do this?

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15 Responses to What if the United States decided to cancel all student debt?

  1. Greg Moon says:

    The economic benefits, even if neutral to positive, would be ignored by politicians. After all, this is one sure-fire way they have managed to enslave now multiple generations since student loan debt (like taxes) is not dischargeable in bankruptcy. Workers with student loan debt are then fundamentally enslaved to the government for the term of their loans, which for some is a large portion of their adult working life. Politicians like citizen slaves, therefore the possibility of this is subzero.

    • Bryan Alexander says:

      Greg, what benefits do politicians see from having “citizen slaves”, if not economic ones?
      Do you mean student debt serves to quash dissent?

  2. Michael Flood says:

    To suggest that a 0.65% – 0.75% of GDP impact on the deficit is “modest” is wildly inaccurate. The historical average deficit (1965 – 2014) was 2.7% of GDP. This would be a 28% increase in the size of the deficit relative to that number.

    Source: CBO, https://lh3.googleusercontent.com/lONowEG8qZ4eQfHKUjrslR-7iuDOyGCuq1hnnOy8_BYqgKgP5yCrlg_j-_GrWCOkUeq7_ccO3dlm5RsNpr10eYfBmLjodcQ8SfzQRhNiT4ej-G3OCjw0RsNtG9dseMjMDOW4yPHe

    Even with current budget projections of the deficit being 3.5% of GDP and approaching 4% of GDP after the tax cuts, you are still talking a 20% increase to the deficit relative to GDP.

    Source: https://www.usgovernmentdebt.us/federal_deficit_percent_gdp

    Finally, this suggests cancellation of current outstanding debt, but I don’t see a proposal for how to address the underlying cost of Higher Education – how do you prevent NEW debt from accruing? Would this go alongside a proposal to make all Higher Education free? Regardless of cost? Regardless of institutional quality? How much would THAT cost? How would it be managed?

    • Joe Murphy says:

      I think Michael’s last question is the really crushing one. Without a change in borrowing behavior, this is just a short-term stimulus. (Which argues that maybe now’s not the time and it’s a card we should save for the next recession.)

      I have an answer, and it starts with taking every last dime the federal government currently spends on loans and loan guarantees, and turning them into grants or scholarships.

    • Bryan Alexander says:

      That’s a good point about the real size of the bailout/cancelation, Michael. It’s a serious amount of money.

    • Bryan Alexander says:

      For your final questions: those are very good, and I’m happy to talk about them (check previous blog posts for samples). But I think this study was much more narrowly focused for good reasons:
      1) The amount of current debt is vast and having negative effects;
      2) Nobody’s modeled this yet.

  3. One thing they don’t say here is the effect on population. Since these debt loaded graduates need to delay having children, there would be a very quick effect on more people not delaying childbirth until their mid thirties. Again this has a knock-on effect on purchases of homes, cars, and child stuff and might help the declining educational attainment of the US versus the rest of the developed world.

    • Bryan Alexander says:

      They just barely touch on this, under household formation.
      It’s fascinating how increasing student debt + increasing education = lower fertility.

  4. Bob Miller says:

    Where, in that entire analysis, is the impact assessment on the Lenders?

  5. Good Borrower says:

    Consider the moral hazard. To make college more affordable, a large federal loan program is created. But colleges continue to raise prices since they know every student admitted has a guaranteed payment mechanism in the loan (See Bowen’s revenue theory of cost). Then these loans are made guaranteed without a credit check, but also virtually unable to discharge them in bankruptcy like other debts. Then after over a Trillion is loaned out, start changing the loan repayment plans to extend to as long as 25 years. Some students diligently pay back their debts while others don’t. The ones that do pay it back are punished for their efforts, while the ones that do not pay it back are rewarded with discharges.

    • Bryan Alexander says:

      True. Perhaps there’s a way to credit those, like myself, who have paid in.

      But isn’t this always the case for a debt jubilee?

  6. Joe Essid says:

    I will stick to one snarky aspect of my original response, posted posthaste at your FB feed: until Congress flips and the Sociopath is no longer in the Oval Office, such a plan has much chance, politically, as Eleanor Roosevelt’s growing wings and flying. Of course midterms are months off and who knows how long our unstable POTUS can live on his KFC and Big-Mac diet?

    Otherwise, I pull back a bit to look at this logically. I’ve downloaded the study, but I’m curious about whether the authors assume that only current debt or all future loans as well would be owned by the Federal Government?

    It’s hard to even have this discussion, despite any merits of canceling or re-assigning student debt, in our current political climate. I fear we are again moving into an era when college will be increasingly beyond the reach of many Americans who, a generation ago, could have afforded it. That exclusion seems consonant with the rise of American plutocracy.

    Yet even I, a first-gen college grad, balk at it as a “something for nothing” deal that seems unfair to those who did pay off their loans. Perhaps if a student’s debt is forgiven, s/he must put in a couple of years of government service? The precedent for that is ROTC, though the service I mention would not have to be military.

    • Bryan Alexander says:

      Yes, the authors see around 90% of debt held by the feds.

      “I fear we are again moving into an era when college will be increasingly beyond the reach of many Americans who, a generation ago, could have afforded it. That exclusion seems consonant with the rise of American plutocracy” – yes. I keep writing and posting about this, but few want to change course.

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