Does Student Loan Cancellation Stimulate The Economy?

Does wide-scale student loan forgiveness stimulate the economy or represent one massive wealth transfer, or both?

Here’s what you need to know.

Student loan cancellation stimulates the economy

Sen. Elizabeth Warren (D-MA), a leading advocate for student loan cancellation, says that student loan forgiveness will stimulate the economy. If her legislative plan passes in Congress, 36 million student loan borrowers would get their federal student loans cancelled completely. Democrats in Congress have also proposed to forgive student loans with 4 changes. Supporters, like Warren, say that student loan cancellation will lead to new business formation, increase consumer spending, increase geographic mobility, increase the marriage rate, help people buy more homes, and save for retirement, among other benefits. In this regard, proponents who support one-time student loan forgiveness say your economic life, whether or not you have student loans, will get better.

Student loans: a massive wealth transfer

However, student loan cancellation means different things to different people. A recent Wall Street Journal op-ed called student loan cancellation a massive wealth transfer that charged taxpayers for the debt of student loan borrowers. The U.S. Department of Education noted that student loan borrowers collectively have saved $5 billion a month since student loan payments have been paused through temporary student loan forbearance. Paused student loan payments will continue through September 30, 2021, which could cost taxpayers another $25 billion. As of September 30, 2021, student loan borrowers will get approximately $90 billion of student loan cancellation since the beginning of the Covid-19 pandemic.

While student loan borrowers welcome those monthly savings, federal taxpayers may be less celebratory. Federal taxpayers like you are covering the cost of that $5 billion every month, and you could pay for student loan cancellation too. This would be true regardless of which of the two main paths to student loan cancellation occur. For example, $10,000 of student loan cancellation could cost taxpayers approximately $400 billion. If there is $50,000 of student loan cancellation, the amount could be as high as $1 trillion. Ultimately, federal taxpayers would pay for student loan cancellation.

Does student loan cancellation stimulate the economy?

Economists can debate the impact of student loan cancellation on the economy. Warren and Senate Majority Leader Chuck Schumer (D-NY) say student loan cancellation will provide a major boost to the economy. Importantly, however, $50,000 of student loan cancellation does not provide $50,000 of potential incremental consumer spending. Student loan forgiveness helps a borrower save a principal and interest payment each month, not the entire outstanding student loan balance. So, a borrower could have $50,000 of student loans, but only would save a $300 monthly payment from student loan cancellation, for example. Then, there’s no guarantee how much, if any, would be spent in the economy. For example, a borrower may use the funds to save for retirement or pay other debt. While this certainly can help borrowers financially, there’s not a guaranteed link to economic stimulus.

Student loan cancellation could mean this

Moody’s found that the economic impact of student loan cancellation would be relatively minimal and would be similar to the stimulus effect of a tax cut. That said, Moody’s believes that wide-scale student loan cancellation would increase household formation, small business formation, home ownership (long-term). Moody’s also found there would be a modest increase in household consumptions and investment. However, Moody’s also found that higher income earners could benefit from student loan cancellation, even if they could afford to make student…