Forgiving Student Loans Is a Regressive, Sorry Excuse for Economic Stimulus

While we are climbing out of this recession at a quicker rate than was initially projected, we still have a ways to go before we experience an economic recovery. In response, President-Elect Joe Biden and a number of prominent Democratic politicians have proposed cancelling some or all of student debt. The latest argument from proponents of student loan cancellation is that it would help provide economic relief to those who hold student debt. 

The first problem with using student debt cancellation as an economic stimulus is the regressive nature of the policy. As the Left-leaning Urban Institute points out, those who are most likely to own education debt are higher-income households. The Left-leaning People's Policy Project also found that the top quintile holds $3 in student debt for every $1 that the lowest quintile holds. 

Survey data from Pew Research shows that those who are struggling with employment as a result of the recession are the ones that are least likely to have student loans. As data from the centrist Brookings Institution show, nearly three-quarters of student loan payments are made by those in the top two quintiles. This further illustrates that those who are most likely to have student loans are most likely to pay back the loans (more on that momentarily). In its July 2020 analysis, the Urban Institute also found that student loan forgiveness "would direct the most benefits to higher-income households."

Second, student loan forgiveness would not really contribute to the economy. The bipartisan Committee for a Responsible Federal Budget [CRFB] calculated that the multiplier (or to put the macroeconomics in layman's terms, the "bang for your buck") is 0.08-0.23, which is much lower than other forms of economic relief implemented in this pandemic (see below). If all of the $1.5 trillion were cancelled, it would mean $90 billion or less in cash available. Why? It would relieve them of the monthly payment, as opposed to giving someone a lump sum amount of cash. Since the typical monthly loan payment is $200-300 (Federal Reserve), it would provide little spendable cash. 

Aside from not providing a real boost to the economy, here are some other issues to take with student loan forgiveness:

1. Three quarters of Americans do not hold a Bachelor's degree. Is it fair to ask someone who has not acquired that level of education to pay for someone who did? Is it fair to those who either avoided debt or paid off debt? This proposal is more unfair considering that those with a Bachelor's degree earn an extra $400,000 in lifetime earnings in comparison to those with only a high school degree (College Board). 
2. As I brought up in my analysis on student loan forgiveness last year, those who are most likely to have difficulties with paying student loans are not necessarily the ones with the largest loans. Those who most likely default are those who drop out and struggle to find a job to pay off the debt (see 2015 article from New York Times here). 
3. Student loan forgiveness misdiagnoses the problem. The single largest factor that has driven up college tuition has been federal subsidies of student loans. The Federal Reserve of New York found that for every dollar in federal subsidies, tuition increased by 60 cents (Lucca et al., 2017). A study from Harvard University concluded that higher education programs receiving federal aid experienced higher tuition hikes than those who did not (Cellini and Goldin, 2012). And here is a Mercatus Center study highlighting the research showing how federal subsidies have exacerbated tuition prices.
4. This would set a bad precedent, which is also known as moral hazard. If current borrowers get their loans cancelled, why wouldn't future borrowers ask for a loan cancellation? This would only serve to jack up tuition prices.
5. According to Federal Reserve Bank of New York labor market data, 33 percent of those with a Bachelor's degree work in jobs not requiring a Bachelor's degree (43.2 percent for recent graduates). How does forgiving student loans solve this issue?

In short, student loan forgiveness is regressive, inequitable, and a poorly targeted form of economic stimulus. I hope that the upcoming Congress does not perform the folly of forgiving these loans.