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Would Forgiving Student Loan Debt Stimulate the Economy?

Jan 6, 2010 Jennifer Williamson, Distance Education.org Columnist | 0 Comments

In early 2009, two Facebook groups were formed to generate support and petition signatures urging President Obama to cancel all student loan debt to stimulate the economy.

Both groups have grown exponentially in popularity since their establishment. Cancel Student Loan Debt to Stimulate the Economy, founded by New York City lawyer Robert Applebaum, attracted approximately 220,000 members within seven months. Stimulate the Economy—Forgive Student Loans, the second group, has collected over 40,000 signatures for a petition it plans to deliver to President Obama.

But would forgiving student loan debt really help the economy? Here’s a look at some of the pros and cons.  

Why Forgiving Student Loan Debt Could Be the Answer

 

Because one-time tax rebates are small potatoes 

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$200 here, $400 there…tax rebates once every few years are one way the government seeks to put more money in the public’s hands—and stimulate spending. But those little infusions of cash often don’t do a lot, particularly for cash-strapped people who have student loans, mortgages, and credit card bills to pay. In this economy, people are more likely to put those checks toward bills than to spend them.

Because student loan debt discourages risk-taking

And risk-taking can pay off big. Still, large student loan debts discourage many students from starting businesses or nonprofits that could help or hire thousands of people and stimulate the economy at the same time.

Because Americans are drowning in debt

Student loan debt isn’t the only nightmare most Americans are facing these days. Many people are dealing with mortgages that are higher than their homes are worth, ballooning credit card debt just to pay for everyday expenses, and rising unemployment. If the government were to wipe their student loans out, that would put these people in a stronger financial position.

Why It May Not Help As Much as You’d Think

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Because only students actively repaying debt would have money to spend 

According to FastWeb, the federal government has about $730 billion in educational loans outstanding—and only about 40% of that is in active repayment. The rest is in forbearance, deferment or delinquency. Forgiving debt that students are not actively paying off would definitely help those students’ financial situations—but it wouldn’t translate into immediate new spending, because these students aren’t spending money on their loans anyway. So the government would be spending about $730 billion to stimulate $292 billion in spending. If the students put every dollar they would have spend on student loans back into the economy.   

People wouldn’t necessarily spend that money

With the economy the way it is, more people are saving than spending nowadays—if they have extra money to save. While many families have mortgages with ballooning interest rates on houses that aren’t worth as much as the mortgage, growing credit card debt, looming health expenses and other financial problems, it’s highly possible that many families won’t be profligately spending any money they’d save on their student loans.

Forgiving all student loan debt isn’t targeted enough

FastWeb brings up another good point—the problem with forgiving all student loan debt is that it doesn’t discriminate based on income. People in high-paying jobs who can afford their loan payments would receive the same forgiveness as people who are struggling. Those funds could be better used if they’re targeted toward students who really need the help the most—and they already are doing this with income-based repayment plans.

It’s not clear whether complete, across-the-board forgiveness of all student loan debt would really stimulate the economy—although there’s no doubt that forgiving student loan debt would drastically improve the financial positions of many college grads. Still, the federal government already provides loan forgiveness for some careers that serve the public good, as well as providing forbearance, delay, and income-based repayment planning for those who need it. None of these are perfect solutions, but it isn’t likely that the government will approve a sweeping forgiveness of all student loans anytime soon.

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