Forgive Student Loans? Worst Idea Ever.

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There’s an argument going around right now that forgiving the country’s student loan debt would have a stimulative effect on the economy. This online petition by Signon.org, an offshoot of Moveon.org, has nearly 300,000 signatures. Its basic argument is this:

Forgiving the student loan debt of all Americans will have an immediate stimulative effect on our economy. With the stroke of the President’s pen, millions of Americans would suddenly have hundreds, or in some cases, thousands of extra dollars in their pockets each and every month with which to spend on ailing sectors of the economy. As consumer spending increases, businesses will begin to hire, jobs will be created and a new era of innovation, entrepreneurship and prosperity will be ushered in for all.

The idea is also being touted by Michigan Democratic Congressman, Rep. Hansen Clarke:

So we asked Freakonomics contributor Justin Wolfers what he thought of the idea. His response is as follows:

Let’s look at this through five separate lenses:

  1. Distribution: If we are going to give money away, why on earth would we give it to college grads? This is the one group who we know typically have high incomes, and who have enjoyed income growth over the past four decades.  The group who has been hurt over the past few decades is high school dropouts.
  2. Macroeconomics: This is the worst macro policy I’ve ever heard of. If you want stimulus, you get more bang-for-your-buck if you give extra dollars to folks who are most likely to spend each dollar. Imagine what would happen if you forgave $50,000 in debt. How much of that would get spent in the next month or year? Probably just a couple of grand (if that). Much of it would go into the bank. But give $1,000 to each of 50 poor people, and nearly all of it will get spent, yielding a larger stimulus. Moreover, it’s not likely that college grads are the ones who are liquidity-constrained. Most of ‘em could spend more if they wanted to; after all, they are the folks who could get a credit card or a car loan fairly easily. It’s the hand-to-mouth consumers—those who can’t get easy access to credit—who are most likely to raise their spending if they get the extra dollars.
  3. Education Policy: Perhaps folks think that forgiving educational loans will lead more people to get an education. No, it won’t. This is a proposal to forgive the debt of folks who already have an education. Want to increase access to education? Make loans more widely available, or subsidize those who are yet to choose whether to go to school. But this proposal is just a lump-sum transfer that won’t increase education attainment. So why transfer to these folks?
  4. Political Economy: This is a bunch of kids who don’t want to pay their loans back. And worse: Do this once, and what will happen in the next recession? More lobbying for free money, rather than doing something socially constructive.  Moreover, if these guys succeed, others will try, too. And we’ll just get more spending in the least socially productive part of our economy—the lobbying industry.
  5. Politics: Notice the political rhetoric?  Give free money to us, rather than “corporations, millionaires and billionaires.”  Opportunity cost is one of the key principles of economics. And that principle says to compare your choice with the next best alternative.  Instead, they’re comparing it with the worst alternative.  So my question for the proponents: Why give money to college grads rather than the 15% of the population in poverty?

Conclusion: Worst. Idea. Ever.

And I bet that the proponents can’t find a single economist to support this idiotic idea.

[HT: Diana Huynh]


Howard

"Conclusion: Worst. Idea. Ever."

Hmm. I can think of ton of ideas that are much more worse than this. That kind of rhetoric makes me think there is something more behind your comments than just pure economics.

My solution to the massive student loan debt in this country: Set up a program such as the peace corps that would allow those with student loans to donate their time to improving the country in exchange to forgiving student loans. If I had to give up 10 hours a week tutoring inner city school kids in exchange for forgiving some of my loans, I would surely do it.

Hugo

I completely agree with Wolfers on this and add one question:

Where is the proof that this will stimulate the economy? What research has been done to prove the idea?

slm

Why would we give money to HS dropouts and unproductive members of society who end up costing us more money in the long run (Link, WIC, other free services)? I say forgive it.

I personally don't think it's fair that forgiveness now is selective - math, science and sped teachers have big chunks of their loans forgiven but they can go anywhere and find a job easier than english or history teachers who get no forgiveness. Not fair! I've worked in poor neighborhood schools my entire 16 year teaching career and have received no breaks other than forebearance when I was unemployed. Forgive the damn loans or at least part of it! Give SOMETHING to the middle class for a change!!!

Steve

Are we a nation with no sense of personal responsibility? You took out a loan, you could have gone to a cheaper state school but instead went to a private one, you lived beyond your means in college (unless you never bought beer in your 4 years there), and you may have chosen a major with little realistic return on your investment. While I'm sure some grads are truly struggling despite making reasonable choices, the idea of bailing out those that made poor decisions is disgusting. If there were a way to separate the truly needy from those that just think they deserve a euro-trash car, college loan forgiveness would sound more reasonable.

Vicki

Dear Steve,

For American students, loans are still necessary to get a degree from "a cheaper state school". It's only the upper middle class families and the rich who can afford to pay for the "cheaper state schools" outright.

Andrew

This would be a high risk ordeal. There are plenty of people who can pay off their student loans with the jobs they receive afterwards and there are those who can't do that because they don't have the job to easily pay it off.

People who have these student loans that they can't pay will probably want the loans forgiven and you really can't blame them.

I think it would relieve many college graduates who can't pay their loans, of course, but as for making a benefit out of it? You can't be entirely sure what they will do with the money. Some will spend it, some will save it, and some will use it to pay off other debts.

I think it is too risky.

MDC

Yes, programs that transfer money to poorer folks, who are most likely to quickly spend it, would be the best form of stimulus. That doesn't make student loan forgiveness the "worst idea ever." It just makes it not as good from a stimulus point of view. Dumb hyperbole doesn't help your argument.

How about a limited student loan forgiveness program AND stimulus that helps those without a college education? Is that freakonomical enough for you?

Vicki

First I want to say that my student loans are all paid-off, and it took me ten years to do it. I think it's shameful that in the richest country in the world, students have to get themselves into debt just to get a degree so that they can earn a decent standard of living. Of course, even under the best of circumstances, they don't get to actually live a decent standard of living until after they've slaved away for a decade to pay-off those student loans!

Secondly, there are flawed assumptions in the logic used by Justin. Starting with: "If we are going to give money away, why on earth would we give it to college grads? This is the one group who we know typically have high incomes, and who have enjoyed income growth over the past four decades. The group who has been hurt over the past few decades is high school dropouts." All groups have been hurt by this recession. Even college grads with advance degrees and work experience on their resume cannot find work. I know of many, many college graduates who cannot find work. I also know of many who are underemployed because the jobs just aren't across the spectrum, regardless of education level. Even those with degrees in fields where they say "the jobs are", such as engineering, are currently facing the situation where there are literally thousands of others with the same degree trying to get the same handful of jobs.

Another flawed assumption is: "Moreover, it’s not likely that college grads are the ones who are liquidity-constrained. Most of ‘em could spend more if they wanted to; after all, they are the folks who could get a credit card or a car loan fairly easily. It’s the hand-to-mouth consumers—those who can’t get easy access to credit—who are most likely to raise their spending if they get the extra dollars." The middle class is disappearing because almost all of us are liquidity-constrained. Most of us cannot afford to save and cannot buy what we want. Banks are not giving out credit cards and car loans like they used to, regardless of income and credit history. That is why, even though interest rates are so low, almost no-one can buy a house---the banks won't loan money! I guarantee you, that if someone can't afford to buy the things that they need and want, that if their student loan payment disappeared, the money would go towards purchases to improve their quality of life each and every month.

The next obvious flawed assumption is: "Want to increase access to education? Make loans more widely available, or subsidize those who are yet to choose whether to go to school. But this proposal is just a lump-sum transfer that won’t increase education attainment. So why transfer to these folks?" Expanding student debt does not make education more accessible. Since government and society as a whole benefit from people becoming middle class and spending their earnings, education should be seen as an investment by society, for the good of society. Government used to subsidy education in a manner which meant that students did not have to take on herculean amounts of debt in order to be middle class. Ask any baby boomer who went to University if they had to get into debt to get an education and hold off on actually being middle class for a decade after they start their career, just to pay off that debt. That is what we can do for current and future students. Since we haven't done right by students over the last few decades, all that we can do to make it right is to forgive their student loans, so that they can have the money that they earn to buy the middle class lifestyle that they've worked so hard to attain.

The next flawed assumption: "This is a bunch of kids who don’t want to pay their loans back. And worse: Do this once, and what will happen in the next recession? More lobbying for free money, rather than doing something socially constructive. " Relieving them of a burden that they shouldn't have to carry is the just and proper thing to do. These "kids" who range from 18-70 years old (maybe some even older as many have had to go to school and take out loans to qualify for benefits after job losses due to inept policies over the last few decades), contribute to society on a daily basis. By making the money that they earn available for them to use in this economy is one of the most socially constructive things that we can do. As Americans funds are freed up for them to consume, more service level jobs are created for those lacking a college education.

And finally, the worst flawed assumption: "This is a bunch of kids who don’t want to pay their loans back. And worse: Do this once, and what will happen in the next recession? More lobbying for free money, rather than doing something socially constructive. " Obviously, no one wants to pay bills. Those who can't have already or are in the process of going into default on these student loans. Why not let normal people lobby for money? If it's a good thing when billionaires and corporations do it, why is it suddenly a bad thing when the citizen populace of this nation does it? Why shouldn't government be asked to serve the people? Why should government solely be there to serve corporations and the ultra-wealthy? When the populace is forced to take on debt due to the privatization of social services (such as education and healthcare) that the government should be providing for it's people (so that they, in turn, can contribute to the nation as a whole), then it is only just to forgive that debt. Too many forget that it's "We The People", not "We The Most Affluent".

Worst. Political Rhetoric touted as economics. Ever

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Ben Stansberry

I'll echo Caleb. I'm 100% sure that if my wife and I didn't have to pay $1000 dollars in student loan debt each month that our spending would increase on things like...a house, appliances for said house, a new car, a new computer. In short, my wife an I avoid any large purchases because our household income of 75k a year for a family of 4 can't cover the 150k of student loan debt we're paying on.

Drew Izzo

I have a better idea. Forgive all mortgages! Hell, car payments too!

Doug

Can't find a single economist to support this idea? Have you not heard of Paul Krugman?

iluvmint

CAUTION: My comment is likely to be disliked. I dislike it myself. This is not an argument for or against forgiving loans.

I want to pay back my student loans because I knowingly took on the responsibility of repayment. I know that it's against my personal best interests to pay them. I have high monthly payments that will take another 25 years pay off. Without these monthly payments I could easily afford to buy a home, go on more vacations etc.

That being stated, morality is not guiding my poisition. Guilt is. I'm also a hypocrit because I'd take full advantage of loan forgiveness if offered it.

andy

I think this analysis is half right. I dissagree that "giving monie to the poor" would have agreater stimulative effect. These college grads with student loans would be more likely to buy a high ticket item like a new car or a house. Poor people paying their electric bill or food bill would not have as great a stimulative effect. (Not to say that poor people shouldn't get help for humanitarian reasons anyway). However, this is a bad idea because who holds those loans that are forgiven? What is the dampening effect of that? What would be the impact on the availability of future student loans?

Jen S

I understand that a lot of college graduates are not necessarily financially successful, as an artist (with a degree) I fall into the category of working poor, but I did not sign that petition. Even though I would love for my student loans to disappear I agree with Wolfers. The income based repayment system that they put into place already provides relief for student loans (in fact my monthly payments are $0) and after a designated amount of time results in loan forgiveness. Because we live "hand to mouth", every cent is spent.

Martin

I was smart and paid off my loan early, what are you going to do for me?

If the goal is to simulate the economy, allow refinancing at lower rates, or perhaps postpone making any payments for a year or two.