Both Bernie Sanders and Elizabeth Warren have pledged to “forgive” all student loan debt if they are elected president. Like all socialist ideas, on the surface that sounds like a wonderful thing, but let’s take a look at their claims, and what would really happen if suddenly all student loan debt was eliminated.
Sanders and Warren both believe that among other benefits, universal student loan forgiveness would reduce the wealth gap in America, provide an economic stimulus to the middle class, increase home purchases, help start small businesses, and enable young people to start a family without a significant debt burden.
However, Moody’s assessed the economic impact and found that student loan debt cancellation would result in only a modest increase in household consumption and investment. They did agree with the progressive senators in that it could lead to an increase in small business formation and homeownership.
However, Moody’s also found that the economic impact would be relatively minimal, similar to a “tax-cut-like stimulus to economic activity” in the near-term. The report also found, among other impacts, the potential for:
- Increased moral hazard: For example, future student borrowers could be incentivized to borrow more student loan debt knowing that their debt will be forgiven.
- More student loan debt: Future student loan borrowers may borrow more student loan debt, but their student loan debt may not be forgiven, leaving them with potentially higher leverage.
- Lost Revenue: Since about 90% of student loan debt is federal student loans, the federal government would lose about $85 billion, or 0.4% of GDP, in forfeited student loan principal, interest and fees.
- Muted Impact Due To Borrower Base: The majority of beneficiaries of universal student loan cancellation are high-income earners, which could limit the economic benefit.
In reality, the true economic impact of student loan forgiveness will be based on how it is implemented, the income of student loan borrowers, how much student loan debt is forgiven, and most importantly who ultimately pays for the student loan forgiveness.
The point of that last paragraph was to say there’s no way to know exactly what would happen, but we all know that there is no such thing as a free lunch, and things that sound too good to be true, usually have a downside.