A Radical Solution to the Student Debt Crisis
This post originally appeared on www.rooseveltinstitute.org
By: Marshall Steinbaum | February 6, 2018
The Levy Institute recently released a research paper I co-wrote with Stephanie Kelton, Scott Fulwiler, and Catherine Ruetschlin that models the macroeconomic impact of cancelling all of the student debt that is currently outstanding in the United States—just over $1.4 trillion, held by between 40 and 50 million borrowers. The federal government would write off the debt for which it itself is the creditor (the majority of outstanding student loans), and it would assume payments on behalf of borrowers for those loans that are held by private lenders. The population’s student loan balance would be reduced to zero—a radical solution to the student debt crisis, but one that deserves serious attention, given the radical scope of the problem.
The paper finds that student debt cancellation would be modestly stimulative to the macroeconomy, increasing annual GDP by $86 to 108 billion per year. It would increase the demand for labor and therefore slightly reduce the unemployment rate. The crucial mechanism driving the macroeconomic results is that the debt currently weighing down the balance sheets of households and individuals would be transferred to the federal government, which is an efficient reallocation from a macroeconomic perspective since it enables households to spend more, provided that the federal government itself is not financially constrained. Since the macroeconomic models we use assume to varying degrees that it is not (a correct assumption, as a previous paper by my Roosevelt colleague J.W. Mason points out), engaging in that fiscal expansion expands output through greater aggregate demand.
Posted on 20 February 2018