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.

caleb b

Oh, I agree. There are certainly better things to spend it on.

My point is that most graduates have taken on a lot of debt. And just like the housing market is dragging down spending, so are student loans.

I mention this later, but for-profit colleges have enrollment of more than 600,000. 90% of those students are taking out the max in federal loans for a worthless degree. This is not sustainable.

Nate

But people have to be held accountable for the debts they owe. If degrees are so worthless, why drop $200k on one? It's the consumer's own fault! Constant freebies and wealth transfers from the government is what's unsustainable in the long run.

caleb b

My wife racked up $150k on a law degree (state school with residency)
I have $50k in an undergrad in business (state school with non-resident)
We will pay it back, eventually.

Wolfers said that student loan people wouldn't spend much of the money. I think he underestimates how much student loans are out there. I also think he doesn't understand the massive influx of for-profit college students. This is a huge bubble that will burst.

Society will have a LOT more poor people because of these for-profit colleges and the "let them eat cake" attitude is not going to fly forever.

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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Cory

Mike - your counterargument seems to be summed up as "yes, but there are a few people who don't fit this stereotype." Well, of course not everyone is the same. But if you're going to apply a rule to everyone - in this case, all former students get their debt forgiven - then you need to look at the average student and the average situation. That's why Justin's comments are spot-on and all of the rebuttals focus on individual situations and individual stories.

Are there poor former-students? Sure. But there are also who racked up huge loans to pay for spring break, classes they didn't attend, fifth (and sixth) years that could have been avoided, and luxuries that weren't needed. If you're going to have a blanket rule of foregiveness, you basically just stuck the taxpayer with the tab for someone's vacations, iPods, and weekend parties to help someone else who may be the victim of circumstances.

I agree that our generation is screwed in that we have to pay for 3 generations - the baby boomers (Social Security), ourselves (401(k)s), and our children (529s). But the answer isn't to shift student loan expenses to the government - which will only charge our generation more in taxes to defray the cost of this transfer.

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Mike

My counter-argument is that the original analysis didn't demonstrate a solid understanding of the student loan landscape, which makes the analysis not very useful. I'm not necessarily for student loan forgiveness, but I think the arguments against it weren't very good.

As for paying for spring break, iPods, etc., we pay for other people's crap all the time. Economic "stimulus" policies seems to favor blanket subsidies to the middle/upper-middle class. Buying a Prius? Have $7,500. Remember cash for clunkers? Cash to those *upgrading* their cars (i.e., already had one). How about the housing "stimulus"? We gave cash to people who were already committed to buying a house.

And if one is concerned that college students spent too much money on wasteful things, why would giving them more cash suddenly raise the concern that they are going to save it? If you agree that they're willing to spend lots of money they don't have, I'd think you'd agree that they'd be willing to spend lots of money they *do* have.

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MBD

So, your argument comes down to: we've had bad policy before, we should do it again?

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.

James

> One last point – many college grads are part of the 15% of the population in poverty.

And if money is instead spent on the 15% of the population in poverty, such college grads would of course not be excluded from such spending. Of course, money would also go to people in poverty without the benefit of the college education. Or, instead of spending $50K helping people in poverty without college debt, we could help forgive my student loans. I make $150K/year. Sounds like a plan.

The reason to look at group statistics rather than anecdotes about the worst-off members of the group is that there's nothing stopping you from fashioning a less arbitrary program then blanket student loan forgiveness.

Faced with a choice where the only options are blanket loan forgiveness or tax cuts for billionaires, maybe this would be a good idea. However, we aren't (are any high-income tax cuts even being seriously discussed at this time?), and this is a terrible, terrible idea.

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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.

Hayley

Tucker,as a recent grad and a current Americorps member, Americorps definitely does not need more money. The money for education they give you at the end of one year is almost as much as you make in the same year (aka less than 15k total for the whole year including the education award)...so really requiring a college degree for most of the Americorps positions (VISTA, anyway), really only hurts because we are making LESS than the poverty level but REQUIRED to have a college degree.
Anyway, my point is I don't think that's where the government should put any money they may use to help the situation.

Nina

Hayley that's only VISTA, and not totally accurate. I did NCCC and worked with many State/National folks. Degrees were not required. I also worked with VISTA a few years later and did not have a degree. NCCC folks also get something like $150 every two weeks, since room and board are paid for.

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?

Trev

I support this idea. It also follows the precedent than borrowing to invest will yield a tax deduction on the interest. If education is to be viewed as an investment (and it is) then this tax deduction on interest should apply to student loans.

It promotes responsibility in repaying the loans and recognition that education is an investment that requires planning and cash flow management.

Irena

We should reevaluate our notion of education. In 2011 it became means to survive rather then a luxury, a right rather then a service. The same as health and healthcare services.
I understand that it's hard to brake that wall, but if you think that firefighters' services once required special insurance, you'll get the idea.
It seems to me that our house is on fire now.

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.

Bryan

Agreed. I don't think your taxes should finance my vacation. I just think the analysis in the original article is off.

I took out student loans knowing the risks and payback options.

If you're looking for a stimulus this isn't the "Worst idea ever" but I'm sure the economy needs something more concrete.

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.

JG

Or allow people to refinance at a current interest rate and reduce their payments similar to a mortgage. I went to B-school during the credit crunch and will pay 6.75% until my loan balance is zero.

If I could refi at a lower rate a large portion of the savings would be spent elsewhere.

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.

Ray

The article was concerning the stimulative effect of forgiving student loans. Whether or not forgiving student loans would 'stop the abuse of student loans by lenders' is not a factor.

Marty B

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

mgnti

I think this suggestion sounds like an interesting compromise. Also, they should reduce loans given to schools that charge excessively high tuition.

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.

This Guy 64

Strong point. When I "save" my money, I'm not just stuffing it in a sack. I'm stuffing it in mutual funds and stocks. That money is doing more than just sitting dormant!

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.

Erin

Sorry, but for those of us smart enough to go to college and then onto grad school, but cannot pay out of pocket the insane amount it costs for professional grad programs like law/pharmacy/medical school, you're basically say only the rich students should enter those careers. My parents are upper middle class, but couldn't afford to send three kids to professional programs without having to borrow.

I plan to pay off my six-figure debt (because I am a responsible, accountable person--and note that all of which was only spent on my education. There were no lavish purchases/trips spent with that money), but if someone were to tell me that they'd wipe it all out, I'd definitely stimulate the economy by building a home and purchasing items that we are choosing not to buy.

pawnman

Actually, Alyssa said she's got $20k in student loans. She didn't say don't go if you can't pay cash, she said don't sign up for a loan if you don't intend to pay it back...very different points of view.

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.

caleb b

"Student loans are for the lazy and should definitely not be forgiven."

Um, or they're for people that didn't get all those scholarships and grants that you did.

pawnman

Should have worked harder in high school

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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sulfide

I worked to pay my loans and received education from a University I could afford. What will get the economy going again is less people who believe they should get a free ride. PRODUCE, that's what you people should be doing, if you have time to cry on the internet, then obviously you aren't using your time wisely if you have debt to pay.

Charlie

We all can debate why or why not student loans should be dismissed, but the bigger picture here is the real issue. Student loans program was created in the 1960's which gave students access to education they couldn't afford. This created a boom in the 70's and 80's to go to college, which drove up prices. The government backed the loans, so university increased their tuition knowing that the loans will be re-payed. At the same time, the US dollar is losing it's purchasing power, making the cost of living rise. So, in the 90's and 2000's, because of these factors, the cost of education is beyond what most students can afford, even in the recent recession, tuition still went up. The US Higher eduction system is now in a Bubble and it's going to crash in the near future.

Government intervention in the loan market is the problem, until this goes away, cost will rise and students will pay more, and the debt will increase. This happen in the housing, and the same outcome is coming to higher education.

Student loans are just a tip of the iceberg in this world debt crises; watch out when the bond market crashes and the dollar gets taken to the wood shed.

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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.

kdh

If their degree is "worthless", then wouldn't they be as useless in the workforce as well? If their debt is forgiven for choosing a "worthless" career path, .

Also, using your "facts", if all student loans only amounted to $50 Billion, it is but a minute portion of our government's debt. And just as Wolfers writes: "Opportunity cost is one of the key principles of economics. And that principle says to compare your choice with the next best alternative", and there ARE better alternatives for spending this money elsewhere that would make a bigger difference in our economy.

caleb b

"if all student loans only amounted to $50 Billion, it is but a minute portion of our government’s debt"

I never said that ALL student loan debt totaled $50 billion. I said that the 600k+ students currently in pursuit of an online, for-profit degree can be reasonably estimated to acquire $50 billion in debt to acheive that degree.

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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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!!!