What Would Actually Happen if ALL Student Loan Debt Was Canceled?

There are scores of Americans — many of them aged in their late 20s and 30s — that have been out of college for at least a decade, but are still paying for their degree. Noting this, it’s not surprising that many have gravitated to the presidential campaigns of people like Vermont Senator Bernie Sanders and Massachusetts Senator Elizabeth Warren — both of whom have promised them an easy way out: just make the debt disappear.

Much ado has been made out of potentially canceling student loans, but very few people have talked about what would happen if student loan debt was actually canceled. We know that during the mortgage crisis, when mortgage loans were foreclosed upon, it preceded a major economic crisis. Would student loan cancelations lead to the same?

A Trickle Up Economy

First: The theory is that if student loan debt is canceled, borrowers will then begin reinvesting into the economy in greater rates. Rather than paying a $300 per month student loan, borrowers would be purchasing homes, buying consumer goods, eating out, and otherwise reinvigorating their local businesses. Thus, the argument is a sort of “trickle up” economy, under which money would no longer be going to the banks, but instead be going to businesses for the enrichment of the lives of the borrowers.

Practically speaking, canceling student debt would mean paying the debt off through federal funds. Thus, in nearly every respect it’s like a tax credit. It’s money being given away by the government towards individuals.

That makes it a stimulus. A stimulus is not unheard of, especially during recessions. Economic stimulus packages are frequent, but they’re not usually that large. An economic stimulus is usually a matter of thousands, not tens of thousands. So, the question of student loan debt cancellation is really one of scale.

America’s Largest Economic Stimulus

There are two extremely large stimulus packages in America’s history. One was the New Deal, which amounted to about $653 billion in economic stimulus, converted into today’s dollars. The other was the American Recovery and Reinvestment Act of 2009. That amounted to $840 billion.

Presently, student loan debt is at $1.47 trillion dollars. That would make it a stimulus far larger than ever before.

But does a stimulus even work?

Like student loan cancellation, the opposition to the New Deal called it fascist and communist. The New Deal significantly expanded the federal government, and there have been arguments regarding whether that was to a positive benefit ever since. But the New Deal differed from student loan debt cancellation, because the money wasn’t given back to citizens directly, but rather reinvested by the government in a variety of initiatives and programs.

The American Recovery and Reinvestment Act gave out $237 billion in tax incentives to individuals, and $50 billion in tax incentives to businesses. It also invested in heavily in government programs. At the end of the act, unemployment rates had been lowered, and generally the economy had improved. But again, much of the money was invested in programs, not just given directly to taxpayers.

Both stimulus packages appear to have worked, but what they didn’t do was put money directly back in the hands of borrowers or debtors. And that’s another issue to consider.

8 Million Student Loan Debtors Are in Default

The argument is that student loan borrowers would start reinvesting in the economy if their loans were forgiven. However, 10% student loan debtors are already in default, and many student loan borrowers are on Income Based Repayment plans. In other words, they already can’t afford their student loans. If the student loans of these debtors were repaid, they wouldn’t be paying any more into the economy, because the money already wouldn’t exist.

This is more of a problem if debtors who are in default, specifically, are targeted for forgiveness. Forgiving those who already aren’t paying their student loans does not effectively add money into the economy because they already don’t have the money to give.

Student Loans Can Already Be Forgiven

Lost in this is the fact that student loan debt actually can be forgiven in certain circumstances. If someone declares bankruptcy and can prove that their student loan debt is an economic hardship upon them, and that they will never reasonably be able to pay back that debt, they can have it forgiven.

If someone is not making enough money to pay back their student loan debt, they can enter into an Income Based plan, which only charges them the amount they can reasonably pay. After 20 to 25 years, the loan is forgiven.

But What Does the Science Say?

Studies have shown that after student loan debt is canceled (it’s happened before on a smaller scale), borrowers do tend to make positive changes in their lives: moving, getting new jobs, and making more money. They were also less likely to experience foreclosures and bankruptcy. So, there is some evidence that student loan cancelations do help the individual.

Interestingly, it may actually help high net worth individuals more than poor ones. High net worth individuals are more likely to have higher than average student loans, because they often go into disciplines such as medicine and law. It would certainly need to be explored in more detail before it entered into serious consideration.

One thing is for sure: the issue is far more complicated than ambitious politicians are willing to admit.

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These content links are provided by Content.ad. Both Content.ad and the web site upon which the links are displayed may receive compensation when readers click on these links. Some of the content you are redirected to may be sponsored content. View our privacy policy here.

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