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]


Caleb b

Between my wife and I, we have $200k in loans. Yes, we earn a higher income than my friends with just a HS diploma, but after paying $1600 a month in loan repayment, we're about the same. Bc of the debt, we're not planning on buying a house or having kids anytime soon. Obviously I want the loans wiped out, but I think Wolfers might be underestimating how much of the money would get spent if this were to pass.

Richard

So you 200K in loans and you pay 1.6K per month. This is supposed to be economic stimulus, so we're really only concerned about the short term effect. Let's say 24 months. That comes out to 38.4K. That means the government has spent $5.20 for every extra dollar you MAY spend over the next 24 months. There are better ways for the government to spend money.

Mike

Usually I like Justin Wolfers, but his comments reveal that he is horribly uninformed.

1) It is faulty to assume that everyone bearing student loans is a graduate. Many take on loans and still do not graduate.

2) There is a very large number of students who are not employed in their field of study because no jobs are available. They are working the same jobs as the "poor", but in addition to their living expenses, they are paying an extra several hundred dollars per month in loan repayments.

3) Today's young bear the burden of supporting the old. They are currently expected to pay for someone else's retirement and their own education costs (which has increased nearly 5-fold over the past few decades) before they can put a cent toward purchasing a house or saving for their own retirement. I have a feeling that we will continue to see a depressed housing market largely because student loans are killing the kind of income stream necessary to make housing affordable.

The best argument against it is that removing future obligations to pay does little to increase short-term spending. As we saw with the last round of stimulus, it's only effective if it takes effect quickly.

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lns

Would a more palatable approach be a program of more targetted loan forgiveness for those entering various public service fields?

A handful of such programs currently exist, such as forgiving a certain level of loan repayment if a physician chooses to work in a primary care field and/or in a rural area for a specified number of years. While on a dollar for dollar comparison channeling financial relief to the poorest strata in society makes both good social and financial sense, indebtedness does shift the economic realities of many highly trained professionals (MDs, PhDs, JDs) etc to a narrower range of options: that is, greater need to enter arenas in the private sector which may be highly lucrative, but do not provide the social benefit of other more poorly-paying, socially minded positions.

Even a modicum of loan forgiveness could serve a strong financial incentive to many threshold cases where the prospect of 6-figures of debt has forced a shift in professional trajectory. Would such a more nuanced initiative lead to more support for such a political movement?

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Peter

While I sympathize with your argument you sound a bit out of touch. You seem to be largely overestimating the liquidity of those saddled with loan debt. In my middle and upper-middle class suburb we have college graduates living with their parents and unskilled labor workers (union backed of course) in their own homes with families, and with more liquidity. Loan borrowers won't spend the money? I'm not so sure, they have other debt they need to pay, apartments they want to move in to and businesses they want to start (since no one will hire them).

One last point - many college grads are part of the 15% of the population in poverty. Or maybe they're not taken into account, but a college grad earning 10-20k a year or less seems to count, to me.

tucker

A better idea would probably be providing temporary subsidies to prevent state universities from raising their tuitions this year. Well that or letting the government hire more people into Americorps/peace corps/public service that includes like a 10-20% loan writedown per year of service.

BL1Y

A good compromise position would be to make all student loan payments tax deductible.

If you rent an office to open up an accounting firm, you get to deduct the rent as a business expense. Why don't you also get to deduct the money spent on your accounting degree?

Bryan

"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"

I'm going to be incredibly stereotypical here, but if you give me (a college grad) a loan break I am going to finish remodeling my basement, fix our guest bedroom, possibly get a new car, and go on vacation. Oh, and buy a gas powered leaf blower! Then the rest goes to retirement accounts. I have no idea what the multiplier is here.

The poor will buy groceries, clothes, and lottery tickets (there's the stereotype). Then possibly be less inclined to look for a job having just been given a handout (also a stereotype). Is the multiplier going to be greater in this case?

Do you have research links supporting your claims?

Steve

This brings up a good point. With all due respect to Bryan and the fact that it could help the economy, I don't want my tax money to help him get a new car, basement, or vacation (and I am a college rad). A lot of college grads have expectations of a certain style of living that tax money shouldn't subsidize.

Jen

Well, I'm not going to tell you you're wrong, but I am going to tell you that I live "hand to mouth," can't get a credit card to save my life, and pay more than $550 a month to Sallie Mae ($400 of which is just monthly interest). Just because my parents were middle class when these loans were given 10 years ago doesn't mean that we are middle class now.

Tom Budd

You're not looking at the bigger picture. It's not about giving out free money. It's about stopping the abuse of student loans by lenders. It's also not about giving money to college grads. It's about providing help to those who have been struggling for years to pay back a loan hit by huge interest rates and fees. The abuse is vast and extreme with no protections in place for the student. This is what needs to change. It is exactly what happened with home mortgages. You should do a bit more research on the issue before you make the ignorant comments you made above.

Marty B

What are your thoughts on making student loan debt dischargable in bankruptcy?

Markus

A political sticky wicket, to be sure, and we don't want a new political arena of college grads pining for handouts. However, the issue of whether it's better to give the money to poor people who will spend it vs. "educated" folks who will save it needs revisiting. The comments overlook the benefit to society of savings and preserving capital; that capital then reinvested into businesses that then benefit a much bigger portion of society. Give $500 to a grad and $500 to a welfare recipient - who is more likely to make that $500 grow? Is that not a better stimulus than spending it on consumables? Where does all this money come from to begin with? Since we're just printing more and more fake money anyway, who is the end recipient is irrelevant. Just print more, and then give more to more people. Problem solved. See all you grads in the bread lines.

alyssa

I agree, this is a terrible idea - DH and I have $20k in student loans left to pay and we are proud of it. We worked hard in school, we took on debt we knew we would have to pay in the future and we are doing so now. IMHO do not take on debt if you do not plan to pay it off, it is not right.

Mike S

Instead of complete forgiveness, what about a program that would allow people to repay loans using pre-tax dollars from their paychecks? I am not – nor do I claim to be – an economist but I would think something like this would a) be much cheaper than the current proposal, b) put more dollars in the pockets of Americans, and c) not set an awful precedent.

I’m sitting on over 100k in student right now and only get a tax break on the interest I pay.

Robin

I completely agree that student loans should not be forgiven! I graduate with my Bachelors this December and I'll have $0 in student loans. I don't have rich parents nor do I have the highest GPA (or anywhere near it). I work full time while being a full time student which allows me to pay out of pocket. I also apply for grants and scholarships and I go to a very affordable college. I do not live at home either, in fact, I just bought my first home last month. Student loans are for the lazy and should definitely not be forgiven.

Roger

as a grad student, I feel that it would be a brilliant idea, but of course I am staring at a huge mountain of debt in the near future

Ardy Cooper

Calling this idea idiotic is idiotic. It might be safe to assume that groups other than graduates with student loans might spend more of what they are "receiving", but this theory of why forgiving student loans is a bad idea has several dubious assumptions as well. It should be noted that many graduates do not have jobs and have applied for, or exhausted the right to, delaying their payments. The amount of their debt grows as interest continues to accumulate, and many have fallen behind on payments. Those who have been late for payments are putting their ability to get a job at risk due to their new poor credit. Others are underemployed, working only to meet their student loans. This group may live with their parents and are not otherwise contributing to the economy. By lifting their encumbrance they could actually spend and contribute to the economy. I could continue, but I need to go to work to pay off my $1100 a month student loan payments that keep me from spending on things outside of what is totally essential.

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caleb b

For-Profit colleges have an enrollment well over 600,000 students. Approximately 90% of all of them are maxing out their federal student loans to obtain a degree that wouldn't get them into the mailroom at my business. I know for a FACT that my company won't even look at a someone with the University of Phoenix on their application.

Take the top six for-profit schools by attendance (623,244 - fall '09) and assume 90% take out the maximum student loans. For 8 semesters, at the max loans ($88,500) that is ~$50 BILLION in debt. That's right. $50 BILLION in loans to obtain worthless degrees. Loans that can never be forgiven until death.

We have a MAJOR problem in the US and someone needs to get on it right away.

http://nces.ed.gov/programs/digest/d10/tables/dt10_246.asp?referrer=listBased on ONE MILLION students.

Kevin P.

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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