The Radical Idea to Forgive all Student Loans

This interesting article in New York Magazine about the proposed economic benefits of forgiving all of the outstanding $1.4 trillion in student loans has been making the rounds recently:

According to the Levy Institute paper, authored by economists Scott Fullwiler, Stephanie Kelton, Catherine Ruetschlin, and Marshall Steinbaum, canceling all student debt would increase GDP by between $86 billion and $108 billion per year, over the next decade. This would add between 1.2 and 1.5 million jobs to the economy, and reduce the unemployment rate by between 0.22 and 0.36 percent.

So, the macroeconomic upside of canceling all student debt would be substantial. The primary (supposed) downsides of such a policy would be a higher deficit, the potentially regressive distributional consequences of debt forgiveness, and (relatedly) the unfairness of rewarding certain well-off borrowers who don’t “deserve” it. Of course, all of these critiques would apply more powerfully to the recently passed tax cut bill. Few people would argue that increasing Harvey Weinstein’s after-tax income was a laudable public policy goal. But no one thinks that we should judge the merits of a tax cut on the basis of whether it rewards any unsavory individuals.

Forgiving $1.4 trillion in debt sounds nuts, but as a convenient near-perfect foil, we instead have a $1.5 trillion tax cut that probably won’t do a whole lot to help anyone who needs it.

The government theoretically profits from the Direct loan program, but the currently rising and soon to be endemic rates of default now predict that the government will start losing a lot of money in the near future.

What most people don’t realize when it comes to the alarmingly rapid rise of student loan default is that the most common culprits are not big borrowers attending expensive private schools (though that happens too, and certainly the need to repay large amounts of debt can be crippling and limits consumption). It’s actually people who borrow less than $10,000. It’s the people, many of whom who never completed a degree program or who received technical training at an unsavory for-profit “institution” like Trump University, who are unable to find the good steady work needed to pay off even a relatively small loan.

As with tax breaks, the biggest winners of the definitely-not-going-to-happen universal loan cancellation would, at least on paper, be high-debt high-income professionals like business school graduates and physicians. But unlike a tax break, not needing to use IDR would result in the same return of 10%+ from every borrower’s income, year after year—a much bigger and likely much more meaningful change, and it would also mean that those who default would finally be able to take steps to rebuild their credit.

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