Would Canceling Student Debt Stimulate the U.S. Economy the Way…

Democratic candidates on the campaign trail have called the student debt crisis, now an estimated $1.5 trillion, a drag on the economy that prevents younger generations of Americans from purchasing homes and making larger investments.

The most left leaning and popular plans supported by Sens. Elizabeth Warren (D-Mass.) And Bernie Sanders (I-Vt.) Are multifold: they want to put an end to a ballooning crisis and close racial wealth gaps. But first and foremost, both want to grow the shrinking middle class by canceling student debt for those who owe the most—graduates in their 20s and 30s.

Daniela Galarza is one of the more than 44 million college graduates with student loan debt who would see relief under these cancellation plans.

“I’m still paying student loan debt off, and often think about how I could have saved for an apartment or home by now if I wasn’t paying out $400-$600 a month for 15 years,” Galarza told Coins2Day.

The average student debt total per person in 2019 is about $30,000, according to Credit.com data, with an average monthly payment of $393 upon graduation. For specific fields, that debt is much higher—medical school graduates owe approximately $200,000 for their education.

Proponents of canceling student debt argue that doing so would put billions of dollars back into the economy, stimulating growth, while providing financial relief to young people. But those against the measure say student debt cancellation would only give a modest boost to the economy, and could even make students’—and the nation’s—financial woes even worse.

Owe Less, Spend More?

Since consumer spending accounts for about 70% of economic growth in the U.S., the more money Americans spend, the healthier the economy becomes. But for those with student loan debt, spending on extras isn’t always an option.

Tiffany Stevens, a Seattle-based freelance journalist, has an income-based repayment plan that she’ll be locked into for years to come. Stevens called she and her wife’s student debt a “burden on our finances that keeps us in a paycheck-to-paycheck situation unnecessarily.”

Putting hundreds of dollars in monthly loan payments back into the pockets of young people would potentially add to consumer spending.

“Those with loan reduction would take the funds that would have gone to their loan payments and use it for other purposes,” Doug Harris, professor of economics at Tulane University, said. “Most of it would go toward consumption. For lower-income borrowers, this would likely mean spending more on basics like food, clothing, and housing. For others, it might mean non-essential like new electronics and entertainment.”

But while estimated to add $86 billion to $108 billion to GDP annually over the course of a decade, the improvement would only be a modest one in terms of the U.S. Economy overall, according to a recent report by Moody’s Investors Service. A similar economic boost could also be achieved through less aggressive means, such as payment restructuring, the report adds.

And canceling other forms of debt could even be more effective at bolstering the economy, Sandy Baum, senior fellow at the Urban Institute, told Coins2Day.

“The timing of doing this, arguing that there would be a stimulus is a little bit strange from a macroeconomics perspective,” Baum said. “We could forgive everybody’s mortgage debt and that would be a bigger stimulus.”

In the U.S., student loan debt is only second to mortgage debt, which surpassed $9 trillion this year.

In order to maximize a true economic stimulus, Baum said, the government needs to focus their efforts on the lower half of the income distribution, which is not what would happen with a student debt cancellation program.

But debt forgiveness could lead to increased homeownership among young people, according to Moody’s, and real estate can have a huge impact on the economy. High real estate sales translate into higher real estate prices and home values, which leave consumers more money to spend.

Erika Stallings, a 34-year-old freelance writer and lawyer living in New York, said that her debt, which is mostly from her graduate studies, is limiting the avenues for employment. Stallings said that she’s holding out on purchasing a house until more of her loans are paid off, though that could be many years down the line.

“I’m hesitant to start a family if I don’t have the money to buy a home because without a home I’m always at the whim of a landlord who may raise my rent or evict me,” Stallings said.

In 2015, the millennial homeownership rate was 32%, though some studies report that the vast majority of millennials would like to purchase a home but have no concrete plan to do so. In fact, the inability to save for a down payment is the primary reason young people aren’t buying, studies show.

But even though young people may be interested in purchasing homes, Harris said, “it’s highly unlikely that even a massive loan forgiveness policy would have a noticeable effect on housing values.”

Would Canceling Student Debt Stimulate the U.S. Economy the Way Candidates Say It Would?

Owe Less, Spend More?

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