Forgive Student Loans? Worst Idea Ever.


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, an offshoot of, 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. Michael bombard says:

    To the person who wrote this you have no idea what my reality is like borrowing 100 k, and now owing close to 300k and having to pay back 780k. My life is a living hell becuse I wanted to change the lives of children so they wouldn’t have to live in a world of abuse. I have failed myself, my family and I have my wages garnished so I now live in a below the poverty level world, I guess the abide has simply moved from my patents to people like you wih don’t care what student loans do to a persons dreams

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  2. Levi says:

    If student loans were forgiven people would spend the money on buying houses, home improvement, better cars, more stuff. This would be stimulating and produce more jobs. This won’t happen because lenders have slaves for life and will never in a million years relinquish their cash cows.

    The author just doesn’t want to be the last person in the world to have repaid their student loans.

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  3. Caprice says:

    I do think forgiving the student loan of Americans is a good idea. However, i do agree that a person shouldn’t take out loans that they don’t intend on paying back. Also i feel that it’s unfair to say all college students are irresponsible, some actually are serious about school and they take out these loans, because they don’t have the money…college is expensive. With that being said, i do feel there should be different programs and incentives for students

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  4. James C says:

    #3. It would certainly help me to go back to school to get my masters and PhD if I could afford to do so. This would not only help my financial situation, but it would also make me a more productive member of society.

    With all due respect, your write up here shows a lot of ignorance and is a pretty skewed argument.

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  5. Ken says:

    Yes lets just give the money to the poor and the people who made poor decisions in their life. Yeah give 50 high school drop outs 1000 dollars and I would guarantee that 35 to 40 thousand of that would be spent on weed, heroin or some other type of narcotic. That isn’t a stereotype I literally see it every single day. High school drop outs and low income families get plenty with social services, free housing, food stamp cards and extra tax benefits for having as many babies as possible. How about we don’t punish the people who finally made the right decisions for once? My wife has a masters degree and can’t find a job that pays more than about 40K and she has over 130k in student loans. She will never pay those off unless she gets a little help and she made the right choices, valued her career as a student and put in years of hard work to earn her degrees. Why can’t she get a little help for her years of dedication and hardwork?

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  6. Jimmy Joe Jack says:

    Wow, you really do not understand the severity of student loan debt for this generation. Of course relieving this burden would boost the economy. This age group used to buy their first house, first car, start a family….all of these things boost the economy. However, millennials are now putting off these life events.

    I agree there is a moral hazard involved and political ramifications, but your other reasons for not forgiving student loan debt is appalling and quite frankly very removed from reality.

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  7. dave says:

    It’s a good idea if at the same time the government stops giving and subsidizing student loans.

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  8. Justin says:

    I think a better solution would be to allow the debt to be discharged through bankruptcy. The problem with student debt is that it is super debt meaning loaning agents do not look at the worthless degree. 18 year olds can’t get 50K for silly business ideas.

    The economics makes sense as a long term stimulus. you can target young , educated, and hopefully motivated workers. Allowing them to build new business, invest in 401Ks, have families, etc. Is it the best stimulus? probably not. However, rarely are the best economic ideas picked. We should repair infrastructure as a short/long term economic growth. But assuming that can’t be done. This may be the best 2nd choice for both short and long term growth.

    If we assume many of the loans will be forgiven with current policies or be delinquent the cost is not as high as projected and the ability to leverage the most promising workers in america both now and for 20 years in the future may be worth it.

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