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).”
(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”.
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?