Government Cancelling Student Loan Debt: Economically Sound?
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.
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