Government Cancelling Student Loan Debt: Economically Sound?

Relevant Link: https://news.wgcu.org/post/economists-say-forgiving-student-debt-would-boost-economy

On November 25, 2019, WGCU, a news organization affiliated with PBS and NPR, published an article titled, “Forgiving Student Debt Would Boost Economy, Economists Say”. The economist the title is referring to is Lawrence Yun, the chief economist for the National Association of Realtors. The article details interviews with several individuals who are suffering from student debt, and the various financial compromises they have made and continue to make to help pay off the debt. Yun argues that forgiving this debt could have huge benefits for the economy, however.

Yun says that: “In the short term, it would be very positive for the housing market...Home sales could be, say, 300,000 higher annually if people were not saddled with large student debt.” The article also cites William Foster, a vice president with Moody’s Corporation. He stated, “There've been some estimates that U.S. real GDP could be boosted on average by $86 billion to $108 billion per year.” Foster does list some of the potential drawbacks of such a plan later in the article. These include reduced income for the government, potential tax increases to raise the revenue needed to pay the debt off, etc.

The idea of forgiving student loans is appealing to many, if for no other reason than the mountain of debt that has been accumulated by students through these loans. Forbes has estimated that the total amount owed by students in 2019 was 1.5 trillion. As the WGCU article points out, both Bernie Sanders and Elizabeth Warren support student loan debt forgiveness, and given their decent performance in polls, their plans could become a reality.

Do the economic arguments in favor of this plan hold any water? Not especially. To his credit, Foster did list some of the potential issues with particular plans. These objections are all well and good, but what about the economic arguments in favor of these plans? Do these arguments hold any water?

First, Yun’s perceived benefits for housing. I don’t argue with the fact that if more working-class adults in their 20s and 30s didn’t have to pay back student debt, then they would be able to afford to buy houses. However, his argument proves far too much. If economic benefits exist for forgiving student loan debt, why not expand the program to all debt? Imagine the areas of the economy that could benefit from abolition of credit card debt? Total private debt in America stands at roughly 27 trillion. The benefits for eradicating this mountain of debt could be huge! Economic nirvana could await us if only we had the courage!

It isn’t any supruise that payments towards student loans are keeping young adults from making mortgage payments. The idea that spending money in one place prevents you from spending it in another is the definition of opportunity costs! Again, one could say that same about credit card debt. Those payments might be keeping individuals from retiring as early as they want. They could also be preventing individuals from buying houses as well! Yun’s argument applies here just as well as to student loan debt.

Would forgiving student loan debt increase GDP? It very likely would, as it would help increase spending in the short term, as money that would have been going to paying off debt would instead go, at least in part, toward consumption. Again, this same argument can be made in favor of any type of debt you choose. Going back to the example of credit card debt, abolishing it would probably increase spending even more than student loans! Those that go into heavy credit card debt are in such debt likely because of an excess of consumption. Why only student loan debt instead of other kinds of debt?

The arguments of Yun and Foster are not actually arguments about student loan debt. They are about debt. Their arguments apply just as well to abolishing any type of debt. This being said, the sympathy towards the massive accumulation of student loans over the last two decades or so is understandable. The growing cost of college is a well known phenomenon. However, the problem is not about the debt per se, but why college is so expensive to make that debt as large as it is. Students taking out loans is not necessarily new, but why is it now both commonplace and so expensive?

The reason for climbing student debt is fairly simple. If the cost of something is increasing, then the reason must be either increasing demand, or decreasing supply. Simple economics. Colleges aren’t closing down at rapid paces, so that leaves us with increased demand. With virtual guarantee of student loans by the government, this means that anybody who wants to go to college can. Those that go to college generally make more money than those that do not, so going to college is a lucrative idea, especially given that all the costs of doing so are put off until later.

Put all of this together and the result we would expect is similar to the world around us today. Almost everyone goes to college, and the price of doing so keeps going up to match the growing demand. This will result in an increasing number of individuals with degrees, even if they aren’t necessary for the job they do. More and more students graduate with PhDs only to find that the jobs available are slim pickings at best. This results in a glut of graduates with higher degrees unable to find suitable jobs, and thus often have to settle for unsuitable jobs. These sub-par employment options often are not associated with or require the degree they labored over for years.

The purely economic case for having the government abolish student loan debt is weak. However, what we should we do? Are we to just leave the next generation saddled with debt that they will truly struggle to repay? The best, and admittedly most radical, solution to cancel the debt owed to the government. This is their mess, and students should not have to be the ones to repay it. As far as debt owed to private entities, this is legitimate debt to be repaid. Even if the government caused prices for college to be astronomically high, private entities voluntarily lent, even if the price was high. It is difficult on ethical grounds to say that one should not at least attempt to repay their debtors simply because the amount owed is large! Regardless, this experiment with government in educational loans will serve as a valuable lesson for the future.

Student loan debt is not a problem with debt, but a problem with rising prices. Prices keep rising seemingly into infinity because the government is willing to lend seemingly into infinity. Politically popular programs extending loans to anyone and everyone have yielded their results. Until this is recognized, the solutions will always swing above the problem as opposed to striking at the root. Fixing the government's problem by adding more government “solutions” is akin to throwing gasoline on a fire. This entire system, however, needs to be burnt down