Do You Support Student Debt Cancellation? Here's Why You Should

The Levy Economics Institute-- a nonpartisan public policy think tank at Bard College-- just published The Macroeconomic Effects of Student Debt Cancellation by Stephanie Kelton, Scott Fullwiler, Catherine Ruetschin and Marshall Steinbaum. Sound familiar? Kelton was Bernie Sander's economic adviser and Bernie made a very big deal out of student debt all through the campaign, so big a deal that even Clinton and other states quo candidates addressed the issue seriously. I suggest you read the entire paper but this is the Executive Summary:

More than 44 million Americans are caught in a student debt trap. Collectively, they owe nearly $1.4 trillion on outstanding student loan debt. Research shows that this level of debt hurts the US economy in a variety of ways, holding back everything from small business formation to new home buying, and even marriage and reproduction. It is a problem that policymakers have attempted to mitigate with programs that offer refinanc- ing or partial debt cancellation. But what if something far more ambitious were tried? What if the population were freed from making any future payments on the current stock of outstanding student loan debt? Could it be done, and if so, how? What would it mean for the US economy?

This report seeks to answer those very questions. The analysis proceeds in three sections: the first explores the current US context of increasing college costs and reliance on debt to nance higher education; the second section works through the balance sheet mechanics required to liberate Americans from student loan debt; and the final section simulates the economic effects of this debt cancellation using two models, Ray Fair’s US Macroeconomic Model (“the Fair model”) and Moody’s US Macroeconomic Model.

Several important implications emerge from this analysis. Student debt cancellation results in positive macroeconomic feedback effects as average households’ net worth and disposable income increase, driving new consumption and investment spending. In short, we find that debt cancellation lifts GDP, decreases the average unemployment rate, and results in little inflationary pressure (all over the 10-year horizon of our simulations), while interest rates increase only modestly. Though the federal budget deficit does increase, state-level budget positions improve as a result of the stronger economy. The use of two models with contrasting long-run theoretical foundations offers a plausible range for each of these effects and demonstrates the robustness of our results.

A one-time policy of student debt cancellation, in which the federal government cancels the loans it holds directly and takes over the financing of privately owned loans on behalf of borrowers, results in the following macroeconomic effects (all dollar values are in real, in ation-adjusted terms, using 2016 as the base year):

• The policy of debt cancellation could boost real GDP by an average of $86 billion to $108 billion per year. Over the 10-year forecast, the policy generates between $861 billion and $1,083 billion in real GDP (2016 dollars).
• Eliminating student debt reduces the average unemployment rate by 0.22 to 0.36 percentage points over the 10-year forecast.
• Peak job creation in the rst few years following the elimina- tion of student loan debt adds roughly 1.2 million to 1.5 million new jobs per year.
• The in ationary effects of cancelling the debt are macro-economically insignificant. In the Fair model simulations, additional inflation peaks at about 0.3 percentage points and turns negative in later years. In the Moody’s model, the effect is even smaller, with the pickup in in ation peaking at a trivial 0.09 percentage points.
• Nominal interest rates rise modestly. In the early years, the Federal Reserve raises target rates 0.3 to 0.5 percentage points; in later years, the increase falls to just 0.2 percentage points. The effect on nominal longer-term interest rates peaks at 0.25 to 0.5 percentage points and declines thereafter, settling at 0.21 to 0.35 percentage points.
• The net budgetary effect for the federal government is modest, with a likely increase in the de cit-to-GDP ratio of 0.65 to 0.75 percentage points per year. Depending on the federal government’s budget position overall, the de cit ratio could rise more modestly, ranging between 0.59 and 0.61 percentage points. However, given that the costs of funding the Department of Education’s student loans have already been incurred, the more relevant estimates for the impacts on the government’s budget position relative to current levels are an annual increase in the de cit ratio of between 0.29 and 0.37 percentage points.
• State budget de cits as a percentage of GDP improve by about 0.11 percentage points during the entire simulation period.

• Research suggests many other positive spillover effects that are not accounted for in these simulations, including increases in small business formation, degree attainment, and household formation, as well as improved access to credit and reduced household vulnerability to business cycle downturns. Thus, our results provide a conservative estimate of the macro effects of student debt liberation.

The authors remind us that "There is mounting evidence that the escalation of student debt in the United States is an impediment to both household financial stability and aggregate consumption and investment. The increasing demand for college credentials coupled with rising costs of attendance have led more students than ever before to take on student loans, with higher average balances. This debt burden reduces household disposable income and consumption and investment opportunities, with spillover effects across the economy. At the same time, the social benefits of investment in higher education-- including human capital accumulation, social mobility, and the greater tax revenues and social contributions that flow from a highly productive population-- remain central to the economic advantages enjoyed by the United States... A program to cancel student debt executed in 2017 results in an increase in real GDP, a decrease in the average unemployment rate, and little to no inflationary pressure over the 10-year horizon of our simulations, while interest rates increase only modestly. Our results show that 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."

Jenny Marshall is running for Congress in a North Carolina district occupied by Virginia Foxx, chair of the House Education Committee, kind of ironic since Foxx has worked tirelessly against public education. "Several days ago," Jenny told us, "I had a long conversation with a young pastor who has a significant amount of student loan debt from seminary. He is worried that the student loan forgiveness program is going to be eliminated because Rep. Foxx with her PROSPER Act has no sympathy for students who have to take out loans to pay for their college expenses. This pastor, who is serving his community through an outreach program for at risk Hispanic youth should not have to worry about the career choice he made with the looming student loan debt he has to repay. Why is our federal government making a profit off of students who seek a better life?  With so many jobs requiring postsecondary education why are we still shackling them with mountains of debt? If we truly want to invest in our future we must deal with the student loan bubble before it bursts. I support student loan debt cancellation and the funding of public colleges and universities."

David Gill is the candidate in central Illinois running for the congressional seat Ryan puppet Rodney Davis is wasting. "I definitely support student debt cancellation," he told us, "for the same reasons that I have long supported tuition-free access to public universities, colleges, and trade schools. Sadly, in our theoretically egalitarian society, social mobility is suppressed here in America far more than in most other developed nations. If you are born into poverty here, the overwhelming odds are that you will remain in poverty. Removing the financial barriers to higher education would be a significant step toward restoring social mobility, giving people an opportunity to improve their lot in life."

UPDATE from Albuquerque


Antoinette Sedillo Lopez, the best candidate in a crowded primary field, just told us that "This is an example of how doing the morally right thing is also fiscally smart. This research is of critical importance to the future of higher education in this country. Too many college students are burdened with crippling student loan debt. The federal government should not make a profit on the backs of college students preparing themselves to make contributions to our society. Public colleges/universities and vocational training should be free.That is why I will co-sponsor and champion the College for All Act. And, we can even do better than that for those who have been burdened with outrageous student loan debt by allowing them to re-finance federal student loan rates at a lower rate that prioritizes students rather than government profits. At $1.4 Trillion, the student loan debt crisis has reached epidemic levels, and Congress must act!" Consider contributing to her campaign-- as well as to Jenny's and David's by clicking on the Blue America congressional thermometer on the right.