Forgive Student Loans? Worst Idea Ever.

By Justin Wolfers.

"There’s an argument going around right now that forgiving the country’s student loan debt would have a stimulative effect on the economy. This online petition by Signon.org, an offshoot of Moveon.org, has nearly 300,000 signatures. Its basic argument is this:

Forgiving the student loan debt of all Americans will have an immediate stimulative effect on our economy. With the stroke of the President’s pen, millions of Americans would suddenly have hundreds, or in some cases, thousands of extra dollars in their pockets each and every month with which to spend on ailing sectors of the economy. As consumer spending increases, businesses will begin to hire, jobs will be created and a new era of innovation, entrepreneurship and prosperity will be ushered in for all.

The idea is also being touted by Michigan Democratic Congressman, Rep. Hansen Clarke:

So we asked Freakonomics contributor Justin Wolfers what he thought of the idea. His response is as follows:

Let’s look at this through five separate lenses:

1. Distribution: If we are going to give money away, why on earth would we give it to college grads? This is the one group who we know typically have high incomes, and who have enjoyed income growth over the past four decades.  The group who has been hurt over the past few decades is high school dropouts.
2. Macroeconomics: This is the worst macro policy I’ve ever heard of. If you want stimulus, you get more bang-for-your-buck if you give extra dollars to folks who are most likely to spend each dollar. Imagine what would happen if you forgave $50,000 in debt. How much of that would get spent in the next month or year? Probably just a couple of grand (if that). Much of it would go into the bank. But give $1,000 to each of 50 poor people, and nearly all of it will get spent, yielding a larger stimulus. Moreover, it’s not likely that college grads are the ones who are liquidity-constrained. Most of ‘em could spend more if they wanted to; after all, they are the folks who could get a credit card or a car loan fairly easily. It’s the hand-to-mouth consumers—those who can’t get easy access to credit—who are most likely to raise their spending if they get the extra dollars.
3. Education Policy: Perhaps folks think that forgiving educational loans will lead more people to get an education. No, it won’t. This is a proposal to forgive the debt of folks who already have an education. Want to increase access to education? Make loans more widely available, or subsidize those who are yet to choose whether to go to school. But this proposal is just a lump-sum transfer that won’t increase education attainment. So why transfer to these folks?
4. Political Economy: This is a bunch of kids who don’t want to pay their loans back. And worse: Do this once, and what will happen in the next recession? More lobbying for free money, rather than doing something socially constructive.  Moreover, if these guys succeed, others will try, too. And we’ll just get more spending in the least socially productive part of our economy—the lobbying industry.
5. Politics: Notice the political rhetoric?  Give free money to us, rather than “corporations, millionaires and billionaires.”  Opportunity cost is one of the key principles of economics. And that principle says to compare your choice with the next best alternative.  Instead, they’re comparing it with the worst alternative.  So my question for the proponents: Why give money to college grads rather than the 15% of the population in poverty?

Conclusion: Worst. Idea. Ever.

And I bet that the proponents can’t find a single economist to support this idiotic idea."