Forgive Student Loan Debt to Stimulate the Economy

Over the last year, many major newspapers in the United States have called for the government to forgive student loan debt to stimulate the economy. The reasoning for this is that by forgiving student loan debt, not only will millions of people immediately start putting money into the economy that is currently going to private companies which are making a profit at no risk (as the government guarantees the loans), but the college-educated are exactly those who are most likely to take their newfound cash and start new small businesses, again stimulating the economy. Some would argue that this is, in fact, the most efficient way to get money flowing again. If you believe that tax cuts stimulate the economy, think of this as a large tax cut targeted at those most likely to immediately plow the money into creating jobs.

One of the largest arguments against forgiving student loans is that it will hurt the banks that made those loans. In reality, it wouldn't; the federal government would pay the loans back immediately. However, because lenders would no longer be able to collect interest payments, they would have to start lending money again unless they want to sit on a huge pile of cash that's of little benefit to them. Having those reserves should also give banks more confidence to resume lending again. 

The other main argument is that this isn't fair to those who worked their way through school or were able to pay off their loans. That's true, it isn't. However, Cash for Clunkers wasn't fair to those who couldn't afford a new car, and the homebuyer's tax credit wasn't fair to those who couldn't afford a home (a group which, incidentally, those who need this new program fall into). The wall street bailout in 2008 wasn't fair either.

The point is, each of these programs may have been unfair, but they helped the economy survive the recession, and this would do the same. Does it make sense to oppose a program that will help everyone, just because those who went into debt to afford a college education will be helped more? 

Senator Dick Durbin (D-Ill) has introduced legislation to allow student loans to be discharged in bankruptcy; while this is a positive step forward, successfully declaring bankruptcy is extremely difficult, and this does nothing for those people who are just barely able to make their monthly payments. 

In the UK, student loan interest rates are being reset to 0%, which both cuts the required payments and keeps students from paying several times the original cost of their education. 

On March 11, the Wall Street Journal ran an article about how customers who have lowered their debt, through a combination of paying it down and defaulting on loans, are now increasing their spending, stimulating the economy. They use as an example a couple who were previously $1 million in debt, but paid off two rental properties and walked away from the mortgage on four others.

In other words, the economy is expected to improve due to people having less debt, but they largely have less debt due to defaulting on mortgages, credit cards, etc. On the other hand, students (whose debt is due to trying to better themselves rather than buying things they can't afford) don't have the option of walking away.

Sounds like a pretty good argument for forgiving student loans right there! 

Want to know more? Check out the FAQ on the official page for the movement.