Canceling $1.4 Trillion in Student Debt Could Have Major Benefits for the Economy

By Jillian Berman, MarketWatch

08 February 18

A novel theory about the affects of wiping out outstanding loan debt for 44 million Americans

t’s not uncommon to see student loan borrowers muse about what would happen if their student debt was suddenly wiped out. Whether it’s an unlikely pipe dream or due to legal issues with their college, it’s a life-changing fantasy.

Now, we have a sense of how widespread student debt cancellation would affect even those who don’t hold loans. And it appears, things might actually get better for all of us.

Wiping away the $1.4 trillion in outstanding loan debt for the 44 million Americans who carry it could boost GDP by between $86 billion and $108 billion per year, on average for the 10 years following the debt cancellation, according to a report published by the Levy Economics Institute of Bard College. Getting rid of the debt would also lower the average unemployment rate by 0.22 to 0.36 percentage points over 10 years and could add between 1.2 million and 1.5 million jobs per year, it found.

“That is a dollar for dollar bump up in their net worth,” said Stephanie Kelton, a professor of economics and public policy at Stony Brook University and one of the authors of the report. In addition to becoming wealthier, these borrowers would have more disposable income to spend on houses, cars, vacations and other goods, which could fuel job growth.

The paper comes as lawmakers are considering changes to the student loan program that could decrease government subsidies to borrowers. The discussion is part of an ongoing debate about how much of the burden of student debt should be shouldered by taxpayers, often at the expense of borrowers.

Of course, cancelling borrowers’ student loans wouldn’t come for free. More than 90% of outstanding student debt is owned by the government, which means that by cancelling it, taxpayers would lose out on interest and principal payments borrowers would have gotten on the loans.

The paper also assumes the government would take responsibility for borrowers’ private student loans in some way. So student debt cancellation would increase the deficit, resulting in an increase in the deficit-to-GDP ratio of 0.65 to 0.75 points per year, the study finds.

Given that push and pull, it’s unlikely that policymakers will seriously consider widespread cancellation of student loan debt. Despite the costs of debt cancellation, Kelton said executing this kind of policy could be worth it, given the economic stimulus.

But there’s also a moral argument to be made in favor of wiping away borrowers’ student debt, Kelton said. Decades ago, public college was nearly or — in some cases — totally free and as momentum builds for other free college programs, it’s possible we could ultimately return to a similar system, she said. Those stuck with the debt now are there because of “an accident of history,” she argues.

“There’s been a terrible policy error made in terms of the failure to continue to treat education as a public good,” she said.