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Report: Widespread Student Loan Debt Forgiveness Would Do Little to Stimulate Economy

By Owen Daugherty, NASFAA Staff Reporter

While proponents argue widespread student loan forgiveness has several demonstrable benefits, stimulating the economy is likely not one of them.

That’s the conclusion the nonpartisan Committee for a Responsible Federal Budget (CRFB) came to in a study that found partial cancellation — in this case $10,000 or $50,000 for each borrower with federal student loans — would produce “only 2 to 27 cents of economic activity for every dollar of cost.”

“It’s time to retire the idea that the regressive cancellation of student debt is a cost-effective way to stimulate the economy,” the report concluded. 

Several lawmakers and advocates for debt forgiveness argue the issue should be viewed primarily through the lense of racial equity in addition to serving as a potential economic stimulator.

A previous study from CRFB analyzing the economic benefits of fully canceling student loan debt found that doing so would produce 8 to 23 cents of economic activity for every dollar of cost. That finding led researchers to speculate that partial student debt cancellation might have a higher multiplier, though that was not the case.

The study pointed to three key factors driving the low multipliers. For one, student debt cancellation would have a small effect on cash flow, exacerbated by the prevalence of income-driven repayment (IDR) plans, according to CRFB. 

Since student loan debt is generally paid off over a long period of time, such as 10 or 30 years, forgiving large amounts of debt results in borrowers having only moderate reductions in their annual repayment costs and only frees up a small amount of additional money to be used, the study found.

With about half of all student loan dollars are connected to non-paying borrowers who are either enrolled in school, delinquent, in forbearance (not including the automatic federal forbearance currently in place), deferment, or default, forgiving large sums of debt wouldn’t lead to an increase in cash flow this year, according to the study. Additionally, the study estimates that about 40% of those dollars come from IDR plans.

“Unless their debt was mostly or completely wiped out, those in IDR plans would continue to make the same monthly payments, based on their income,” the study noted. 

Further, the study notes that since the cancellation is targeted toward those already less likely to spend additional money, it wouldn’t have a stimulating effect on the economy. 

The study also points to the current state of the macroeconomy, given supply and demand constraints as a factor.

“Given high levels of savings, massive stimulus in the pipeline, pent-up demand, supply constraints, inflation pressures, and expectations of a strong economic recovery, additional cash injected into the economy will have few places to go,” according to CRFB. 

Between the economy rapidly improving and encouraging employment figures, the study — while acknowledging the “financial and psychological benefit” — asserts that partial debt forgiveness would not serve as a cost-effective stimulus.

“While some have argued that canceling $10,000 or $50,000 is more targeted than canceling all student debt, all of these proposals are regressive and suffer from low multipliers to stimulate the economy,” the study states. “Absent offsets, all student debt cancellation proposals would also worsen an already precarious fiscal situation given their substantial costs.”

 

Publication Date: 6/7/2021


David S | 6/8/2021 9:1:34 AM

The CRFB staff includes people who have been arguing against Public Service Loan Forgiveness and federal loans for graduate students, as well as proponents of the accounting mumbo jumbo that claims the federal government loses money on student loans. This study was written to prove the conclusion they had already reached and will never sway from.

The CRFB claims that "student debt cancellation would do little to increase cash flow available for spending." Ask an underemployed borrower faced with a $300 monthly student loan payment (since they didn't bother) if not having that $300 payment due would increase the cash flow available for spending or not.

Edward M | 6/7/2021 10:43:51 AM

Maybe it's a poor stimulus to the current economy. But Americans have a dismal record when it comes to savings as well. Seems to me that allowing Americans to save more will have benefits to the future economy and prove a more secure retirement for many Americans.

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