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]

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  1. Kevin P. says:

    Student loans have become a big racket, with the biggest beneficiaries being the nation’s colleges and universities. This helps push the never ending inflation in tuition.

    Here are three simple reforms for student loans that will restore common sense to this area:

    1) Make them dischargeable in bankruptcy like almost all other loans.

    2) At loan origination time, make the lender and the university provide full faith and realistic disclosures about the income expected after graduation for the proposed course of study, and these disclosures should be subject to standard fraud protections

    3) Restrict federal government loan guarantees and subsidies to only a few fields of study such as STEM (Science, Technology, Engineering and Math). I would be OK with ending federal government loans altogether, and letting the states subsidize higher education if they want to.

    For some reason, we have accepted, as an article of faith, that any and every type of college education is the only ticket to success in the future. This is often the case, but often not.

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  2. Howard says:

    “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.

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  3. Hugo says:

    Hidden due to low comment rating. Click here to see.

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  4. slm says:

    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!!!

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  5. Steve says:

    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.

    Hot debate. What do you think? Thumb up 29 Thumb down 28
    • Vicki says:

      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.

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      • Enter your name... says:

        Funny, but when I consider myself and my three sisters, three of us graduated debt-free—no debt of any kind, “student loan” or otherwise, and the fourth paid off her student loans twice as fast as the government expected her to.

        None of us worked more than 15 hours/week during college. None of us received even $100 in financial support from our parents over the entire course of the entire degree. (In fact, in the course of our college experiences, our mother died and our father declared bankruptcy twice, once from her medical expenses and once from his business failing.)

        If our dirt-poor blue-collar family can do it, then so can middle-class families. They just have to make the same kinds of choices that we did: Do you live at home for free, or do you rent an expensive apartment? Do you make do with a hand-me-down computer from the neighbor, or do you buy a pricey new one? Do you figure out how to send e-mail for free, or buy a cell phone? Do you drive a car, or decide that if you can’t get there on your own two feet, you didn’t need to get there at all?

        Hot debate. What do you think? Thumb up 11 Thumb down 10
      • Vicki says:

        I wish you had entered your name, so that I could actually reply to “Enter your name…”,

        These are the choices I made/experiences I had.

        I graduated from Bloom Trail High School in 1990. I’m sure you know it, as it was the high school in the Freakonomics movie, and the neighborhood that they showed in the movie was mine.

        Living at home for free is financial support from your parents (every bite of food, every night under the roof, every “luxury” that you partake of while there they are subsidizing you and your college education! Guess what “Enter your name…” your parents subsidized a lot of your education!)…which may explain why you and your sisters could put all your earnings towards getting a degree.

        That was not an option for me, in my “dirt-poor-blue-collar” family. If I were to have stayed in my parents house, the only option would have been to work multiple jobs and turn the money over to them to help support the household. Living at home, going to college, and not handing over any money earned to help support the household was not an option. It really isn’t an option for most working class families; they can’t afford for it to be an option.

        I scored very well on the ACT. I got accepted into every University that applied to: University of Illinois (both Champaign-Urbana and Chicago campuses), Illinois State University, etc…) There was going to be no help whatsoever from my parents if I went to college; housing included. There were even fights about getting the tax info that I needed from them each year so that I could even apply for financial aid (as if you are not married or don’t have a child/dependent you have to include your parents info on the Financial Aid form if you aren’t 24 years old or older). I applied to lots of different places and decided to attend Eastern New Mexico University as out-of-state tuition there was less then tuition even at Prairie State College (the local community college where my parents lived) was at the time.

        I lived as cheaply as I could, with roommates to help deter the costs. It was always the cheapest housing we could find—there really weren’t any expensive apartments to even choose to rent. Since I was self-supporting it took all of my minimum wage job earnings (both Work-study and at a pizza place) to pay for the basic survival stuff. As several other posters have commented, it depends on what type of degree you’re getting, whether or not you can have the time outside of your studies to work full time. I could not, but I always worked as much as I could. There were no trips. Nothing uber-nice. Yes, I had a cheap alarm clock radio and a TV, they were not new when I got them, but things others who were moving did not think were worth the cost of moving them.

        A computer was not an option–though one was needed for my coursework. There was no hand-me-down one from any neighbor to have. I was constantly in and out of the various University computer labs on a daily basis, because I couldn’t afford a computer to do the work at home. Most times, my roommates and I didn’t even have a phone—and back then cell phones were expensive to get and cell phone service hadn’t really come to Eastern New Mexico to even be an option. Email is always free for University students, off of University computers. Walked everywhere because even if I could buy a junker—there was no way to pay for gas or insurance; let alone oil changes or car repairs.

        The only way to pay for my University were the Perkins and Stafford loans that I took out. The amount of the Pell Grants wouldn’t even cover lab fees, let alone actual tuition or books. When I went to graduate school, I took out more loans as the only income I had was from my TA/RA positions, which didn’t cover it. Again, if you’re in a professional program, there’s no way to do it properly and work full-time. It’s one or the other. By the time I finished with Graduate school in December 1996, I had $50,000 in Student Loan debt which was unavoidable. It took me 10 years of slaving away to pay-off that debt.

        So, “Enter your name…” any other questions???

        People can only make the choices/have the outcome that you did if:
        1. They are lucky enough that they can live like parasites off of their parents while attending college (thus not having to support themselves)
        2. They are lucky enough to happen to live in an area/state with low tuition at the state schools (and therefore don’t have to move out-of-state to attend one)
        3. They are lucky enough to be in a situation where all the money that they earn can be applied towards their education (follow-up to item #1)
        4. They have the good luck of the amount of tuition and fee increases from year to year not being unduly high, yet necessary for their degree.

        If we as a society would invest in education, like we successfully did for the baby boomer generation, then it would not be necessary for students to accumulate student loan debt just to get the education necessary to gain entry to a career that after many years will help them get into the middle class (and therefore be able to give back to society through their taxes).

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  6. Andrew says:

    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.

    Thumb up 6 Thumb down 3
    • Corrado says:

      If the target is to help those students that, even doing everything right, are unable to repay their loan wouldn’t be better to give subsidies to enterprises? More jobs and lower chances for those former students to be in their present “bad” situation, the bad side is that it probably takes too long to work.
      On the other side if the idea is just to push consumptions I agree giving 1.000 dollars to poorer people is more fair.

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  7. MDC says:

    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?

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    • James says:

      It’s not just terrible from a stimulus standpoint; it’s terrible from a distributional fairness and education policy standpoint.

      I make $150K/year and have $50K in loans outstanding. Even if you are already doing a stimulus that helps those without a college education, there is simply no sane reason to give me $50K instead of spending that $50K on a slightly larger such stimulus (or on people in poverty with or without a college education, etc.).

      Further, this does absolutely nothing to address rising costs of education but it is presumably a one shot deal (or at least not likely to be repeated for a long time), so recent graduates are helped a lot while graduates in the near future are still screwed.

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  8. Vicki says:

    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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    • nancym says:

      @Vicki
      “Worst. Political Rhetoric touted as economics. Ever” Best reply to the totally flawed assumptions in this article yet! I was shocked at the naivete of this article’s writer.

      I admit that when the discussion of loan forgiveness first got national attention, I was a bit skeptical about how it could be done without a big fat moral hazard, even though I still have student loans myself, and I’m a senior now on Social Security, facing decreasing chances of increasing yearly incomes. I am also familiar with some students who take on excessive student loans out of sheer lack of understanding of the consequences. On the other hand I am very familiar, having worked at such institutions, with the tactics of private colleges trapping unaware students into excessive debt with outright lies about their future employment expectations, using the government’s loan guarantees as yet more incentive to logging big commissions for student enrollment.

      But when I read the proposed legislation that was introduced in March of 2012, months after this article and all these responses to it–that is HR4170– this approach made sense to me. The proposed bill is not a simple wholesale giveaway of government funds, but a measured response to help those who have made a good faith effort to pay back a certain percentage of their loans over ten years, based on a percentage of their actual income or periods of unemployment, which certainly addresses the situation of many who have suffered through the years since 2007. (The bill would start the clock on loans in repayment since ten years prior to enactment.)

      But the legislation would also put a cap on the amount of forgiveness for any future loans, limiting the degree that any future borrowers would simply take advantage of that aspect in calculating their future debt when starting school. The bill does other things like limiting interest and provides more incentive for public service forgiveness, among other provisions. If anyone wants to view the text of the bill or comment on it, you can read it at OpenCongress.org here: http://www.opencongress.org/bill/112-h4170/show

      One more note, it has been argued here that this movement would result in just rewarding the banks with payments from the government, but the last thing a bank wants is a loan that is paid off early. Banks and other creditors want the interest they earn to go on forever without touching the principal, so in the long run we would be taking some of that interest and investing it in our citizens, those most likely to start small businesses, instead of further enriching the banks, who are not lending to small businesses!

      The economy is slowly getting better, though it may never catch up in my lifetime to the levels it was before. But we have an entire swath of the population, not just 20-30 year-olds, that was seriously harmed during the last few years, punished by circumstances rather than anything they did wrong, all while others (bankers, etc.) reaped huge benefits from financially raping the rest of the population. This bill is not a complete fix for that injustice, but it may be a step in the right direction.

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