Is It Time For a Student Debt Bailout?

Jed Oelbaum

Every year, hordes of hapless 17-year-olds sit down at the kitchen table, opening college admissions letters and signing on to borrow an amount that could buy several new Honda Accords. Certainly you could argue that a good education is worth more than any number of sedans. But you could also argue, as several economists have recently, that a generation going deep into debt over something even more essential to American life than a car is producing a crisis, and even a bubble ultimately doomed to pop. Over the last few years, some students, activists, and economists have begun advocating for a radical solution: the complete elimination of the country’s student debt burden.

In a recent report published by the Levy Economics Institute at Bard College, four economists—Scott Fullwiler, Stephanie Kelton, Catherine Ruetschlin, and Marshall Steinbaum—explore what would happen if the government canceled America’s student loan debt. “What if the population were freed from making any future payments on the current stock of outstanding student loan debt?” they ask. “What would it mean for the US economy?”

Testing the scenario, the economists found that on a 10-year timeline, “debt cancellation lifts GDP, decreases the average unemployment rate, and results in little inflationary pressure.” The economic activity spurred by the move would create over a million jobs, according to the report. “Though the federal budget deficit does increase, state-level budget positions improve as a result of the stronger economy,” write the economists.  Absorbing these debts would increase the deficit, to some extent, just like tax cuts do, and with the same intended outcome—stimulating the economy by putting money into the hands of people.

College degrees are both more essential to finding a good job than ever before and more expensive, leaving 4 in 10 adults under 30 with student debt. About a quarter have either defaulted or become delinquent on their loans, and those with college debt are also more likely to have a second job. Existing student loan forgiveness programs, such as those for public servants and teachers, have been criticized as confusing and less than robust.

The sheer volume of student debt, which stands at about $1.4 trillion, has become a drag on millions of graduates, sucking up funds that could otherwise be spent, saved, or invested. The idea of canceling it all in a sweeping, large-scale relief effort might have seemed outlandish 15 years ago. But the bank bailouts that followed the mid-aughts financial crisis used public money to buoy an industry whose own reckless behavior caused economic havoc. Having the federal government cancel student debt on a serious scale, proponents argue, would be a similar maneuver to avoid financial crisis, though this relief effort would be focused on consumers rather than Wall Street. To put it another way, forgiving the total student debt load would cost slightly less than the $1.5 trillion tax cut passed late last year, which most notably benefited the very rich.

“By forgiving student loan debt—which is largely held by the government—a tremendous economic stimulus would be generated, whose beneficiaries are people, not banks,” wrote Leon Botstein, president of Bard College, in a op-ed for The Hechinger Report, an education news site. Botstein’s op-ed was written in the run up to the 2016 election, and urged Hillary Clinton and the Democratic Party to take “bold and courageous action” on the issue. He added, “There is no chance that Donald Trump and the Republican Party will embrace such a notion.”

Since taking office, President Trump has, as Botstein predicted, not been particularly bold in dealing with the growing student-debt problem. In fact, the Trump administration wants to eliminate existing loan forgiveness programs for public servants, and has cut protections for students by relaxing rules on predatory lenders and shuttering the Consumer Financial Protection Bureau’s Office for Students and Young Borrowers.

Earlier this year however, Trump’s Department of Education did signal interest in making student loan debt more easily dischargeable in bankruptcy, addressing a major complaint of college borrowers. The difficulty in getting rid of these loans and their long-term presence in borrowers lives’ once led Last Week Tonight host John Oliver to compare student debt to HPV. “If you go to college, you’re almost certainly going to get it,” quipped Oliver. “And if you do, it will follow you for the rest of your life.”

Student debt has even been implicated in millennials’ delayed progress towards milestones like marriage and home ownership. According to the Levy Institute report: “College graduates focused on paying down debt are putting off other investments, like buying a home or starting a family—or taking on yet more debt to obtain graduate degrees that are increasingly necessary as the labor market credentializes.”

The report offers a number of possibilities for how a school-debt bailout could happen, but all involve some version of the federal government taking a loss on the nearly $1 trillion in student loans it holds. Then the government would address private loans, either taking over payments, or outright purchasing the debt and crossing it out.

According to the report, “the positive feedback effects of student debt cancellation could add on average between $86 billion and $108 billion per year to the economy. Associated with this new economic activity, job creation rises and the unemployment rate declines.” The report also cites studies showing that individuals with less student debt are more likely to start businesses, buy homes and get married, and withstand periods of economic downturn.

Of course, not everyone’s on board with universal student debt forgiveness. Arguments against this kind of stimulus usually focus on its public cost, and the poor incentives it provides. In a 2014 column for The New York Times, Paul Krugman argued against such resistance to stimulus, describing it as “the sense that any kind of debt forgiveness would involve rewarding bad behavior.” A one-time debt cancellation program may also strike those who have already sacrificed to pay off student loans as unfair. Even many left-leaning voices object to the idea on the grounds that it favors wealthier students able to take on more debt in the first place. Yale grads with a couple hundred thousand in loans, for example, would benefit much more than those with state college diplomas from their debt being wiped out.

In Slate, senior business correspondent Jordan Weissman called universal student loan forgiveness “an incredibly regressive” idea, saying “The bigger, conceptual problem with mass student debt forgiveness is that it would spend a whole lot of money while doing a very poor job targeting the people who need help.” If you wanted to give the economy a trillion dollar-plus jolt, said Weissman, “you could, for instance, just cut a check to every American, whether or not they were fortunate enough to ever go to college.”

Proponents of large-scale student loan cancellation say that though the bulk of student debt is held by higher income individuals, low-income borrowers struggle more to keep up. According to the Levy Institute report, “Even below-average student loan balances can be problematic for low-income borrowers choosing between making on-time payments and other financial demands.” Student debt also has a particularly insidious effect on minority communities, according to the report, which notes that “minority borrowers take on more debt and have more trouble paying it off,” due to “longstanding racial disparities in both the credit and labor markets, household and family wealth.”

More than that, the report’s authors argue, the economic benefits of canceling student debt would extend beyond the debt holders themselves, and would remove a specific generational yoke that would otherwise cause widespread financial problems for years to come. While wiping out debt isn’t the only possible solution to the problem, write the economists, critics of the policy are working under “outdated assumptions about the distribution of student debt and its implications for both the underperformance of the labor market and for longstanding economic disparities.”

Everyone acknowledges that just wiping away debt one time won’t really solve the bigger problem: how this country finances the runaway cost of an increasingly necessary higher education. Larger, systemic changes would have to be enacted, or a new education-related debt bubble would just form in the old one’s place. Botstein advocated for a new kind of loan system that would amp up rewards for teachers and public servants, and endorsed free public college for families who make under $125,000.

One of the Levy Institute report authors, Stephanie Kelton, is a prominent economist and professor of public policy and economics at Stony Brook University who acted as an adviser to Bernie Sanders’ 2016 Democratic primary campaign. Sanders has maintained that a four-year public university education should be free for all Americans. “This is not a radical idea,” wrote Sanders in a Vice opinion piece last year. “Many other nations around the world invest in an educated workforce that isn’t burdened with enormous student debt.” Last year, Kelton explained the mechanics of how such a program could be possible in a Los Angeles Times op-ed titled: “Congress can give every American a pony (if it breeds enough ponies).”

Maybe unsurprisingly then, the Levy Institute report also cites a free college program as a way to stabilize the situation and establish a new normal, noting, “a ‘public option’ for higher education would be worth the most to the most disadvantaged students.” But while “complementary reform of higher education financing should accompany a student debt cancellation,” the authors clarify that no additional forward-looking policy ideas, like free college, are necessary to create the economic benefits they describe—their research only examines the “specific question of the impact of total cancellation of current debts.”

Politically, it’s hard to see a clear path to such a widespread or radical debt-forgiveness program, but then again, the last couple of years have been full of poll-defying surprises. And as younger Americans assert themselves, as voters and consumers, it seems fair to assume that they will bring new political will to priorities like the burden of student debt—hopefully before the situation collapses under its own weight.