There’s a good chance that, if you’ve got a college degree, you’re still making monthly payments on it—even if you graduated years ago. Student loan debt is a growing problem in this country, with over 44 million Americans trying to pay off $1.4 trillion in combined outstanding debt.
Those are pretty huge numbers, and for people whose college degrees haven’t quickly landed them six-figure-income jobs right out of school, paying down student loans can seem like an impossible task. With no obvious remedies in sight, some economists have proposed a bold plan to cut through the problem of outstanding student loans: eliminating it entirely by forgiving the debt.
The Levy Economics Institute of Bard College released a report in which they simulated a number of debt forgiveness scenarios, under two different time-tested macroeconomic models, the Moody’s model and the Fair model. They found that canceling the student loan debt could potentially have several major, positive effects on our overall economy.
Is an Education Worth all this Debt?
Higher education and a college degree have long been touted as the keys to professional success and financial comfort in life, but as the costs of college have gone up and wages have remained stagnant, many graduates are finding that their expensive college degrees aren’t getting them into careers with salaries high enough to let them pay off their loans.
There are still obvious benefits to attending college. Studies show those with a college education live longer lives, are involved in fewer crimes, and show more civic engagement. College degrees are still helpful, if not necessary, to landing better jobs. Many students are stuck between a rock and a hard place, as they believe they need a college education, but they may be stuck paying for it indefinitely.
While there are some measures in place to make student loans easier to deal with than other forms of debt (the interest payments can be tax deductible, for one), it’s difficult for many to see a clear path out from under the crushing amounts of debt.
Results of Debt Forgiveness
According to the simulations run by the Levy Economics Institute, forgiving all student loan debt would have the following effects on the U.S. economy:
- Increase Consumption and Investment. Without student loan payments to make, most graduates would have significantly higher amounts of personal money to spend every month. This would lead to higher levels of consumer spending, as well as more investments in stocks, retirement funds, and other investment vehicles.
- Boost GDP. Higher consumer spending across the board would lead to increases in the gross domestic product—anywhere from $86 to $108 billion per year, according to the report. A wide variety of businesses would benefit from the increased spending if student debt holders were free to spend their money on other goods and services.
- Create New Jobs. With GDP on the rise and more consumer dollars being spent, more businesses would be able to create and fill new jobs, possibly as many as 1.2 to 1.5 million per year.
- Lower Unemployment. With new jobs being created, the simulations show that average unemployment rates would decrease by between 0.22% and 0.36% over the next ten years.
As far as drawbacks to debt forgiveness are concerned, the report shows that inflation would increase slightly, but only by relatively small amounts.
Effects Beyond the Models
The likely effects of debt forgiveness could result in a number of positive outcomes that can’t really be captured in a model. These include:
- More Small Businesses. Graduates could be more likely to take the risk of starting their own businesses, without the financial pressures of servicing their college debts.
- More Degree Completion. High levels of student loan debt correlate with higher instances of dropping out and failing to finish college.
- Household and Family Stability. Graduates may be more likely to get married, buy houses, and start families, without the burden of student loan debt influencing their future plans.
- Higher Credit Scores. Many people fall behind on their student loan payments when they’re unemployed or dealing with other hardships. This can hurt their credit scores and make it more difficult for them to make major purchases, like cars or houses.
- More Savings and Security. Money not spent on debt repayments can be saved or invested, resulting in greater financial security and leaving people better prepared to deal with costly, unexpected life events.
Student Loan Forgiveness Wouldn’t Only Benefit Borrowers
The analysis from the Levy Economics Institute shows that forgiving student debt could have major effects to the overall economy that would benefit all Americans, not just those who are still paying off the costs of higher education. While debt forgiveness would increase the federal deficit, and the social and cultural implications of forgiving a huge amount of collective debt at once are hard to model or predict, forgiveness stands as an interesting possible solution to the growing problem of unmanageable student loan debt.