student debt

President Trump and Congress could boost the U.S. economy by $1 trillion by simply erasing federal student debt, all for a negligible cost.

That’s according to a recent study by Bard College’s Levy Economics Institute published last week. In applying Ray Fair’s US Macroeconomic Model and Moody’s US Macroeconomic Model, Institute scholars Scott Fullwiler, Stephanie Kelton, Catherine Ruetschlin, and Marshall Steinbaum simulated what would happen to the economy if the approximately $1.4 trillion in student debt held by over 44 million Americans was forgiven.

Incredibly, the simulation showed that over the course of a decade, US Gross Domestic Product (GDP) would increase by anywhere from $861 billion to $1.08 trillion, the unemployment rate would shrink by as much as 0.36 percentage points, and there would be 1.2 to 1.5 million new jobs created in the years immediately following the cancellation of student debt due to the increase in economic activity.

Currently, the student debt crisis is depriving an entire generation of young people from achieving the American Dream, whether that’s owning a home, raising a children, or opening a business. Millennials — defined as those born between 1980 and 2000 — are bearing a brunt of the burden given the rising costs of college tuition in recent years. Roughly $700 billion of outstanding loan balances are held by Americans aged 39 and under, according to 2015 data from the Federal Reserve Bank of New York:

student debt

Students today are having to borrow a lot more than their parents did, which may be the reason for the so-called millennial “baby bust” that’s driving US birthrates to record lows. In a comparative analysis of the percentage increase in consumer prices for various essential commodities like food, shelter, healthcare, the Bureau of Labor Statistics found that the cost of college tuition had risen by more than 1,225 percent between the first quarter of 1978 and the second quarter of 2014:

student debt

The only economic blowback created by forgiving student debt would be a negligible increase in inflation and interest rates, according to the simulation. Inflation in early years would peak at 0.3 percentage points, while eventually decreasing to negative inflation in the years following. Nominal interest rates would peak at 0.3 to 0.5 percentage points, eventually slowing to just 0.2 percentage points. The US budget would see a negligible impact, with the debt-to-GDP ratio increasing by 0.65 percentage points to 0.75 points each year.

To put those numbers in context, the Fed has already raised interest rates by 1.5 percentage points since 2016, and is expected to increase rates three more times in 2018 under current economic conditions. And under the Republican tax plan alone, debt will go from making up 3.2 percent of GDP in 2016 to 5.1 percent of GDP by 2021 according to Goldman Sachs — and that’s for a plan that overwhelmingly benefits the top 1 percent of income earners, rather than 44 million student borrowers.

student debt
Data by the Federal Reserve (Chart by NPR)
student debt
Data by Tax Policy Center (Chart by NPR)

Given the impact student debt has had on consumer spending, the insignificant increases in inflation, interest rates, and the debt-to-GDP ratio will barely register in comparison to the wave of new money flooding into the economy from freed student debtors. The Levy Institute study emphasizes that its findings are merely conservative estimates, as the models used for the simulation don’t account for “spillover effects.”

Research suggests many other positive spillover effects that are not accounted for in these simulations, including increases in small business formation, degree attainment, and household formation, as well as improved access to credit and reduced household vulnerability to business cycle downturns. Thus, our results provide a conservative estimate of the macro effects of student debt liberation.

It’s important to remember that 90 percent of all outstanding student loan debt is owned by the federal government, meaning that an act of Congress and a stroke of President Trump’s pen could erase roughly $1.26 trillion in debt. While leading progressive voices like Senator Bernie Sanders (I-Vermont) have proposed the idea of making public colleges and universities tuition-free, the issue of erasing all student debt outright could be a bipartisan issue.

Given that 2018 is a pivotal midterm election year, Republicans — who control both houses of Congress — are likely trying to find ways to avoid staggering losses predicted by pollsters in November. Any politician or party proposing student debt forgiveness could reap significant political benefits for numerous elections to come by leading the charge to erase all federally owned student debt in the United States.

 

Logan Espinoza is a freelance contributor specializing in economic issues. He lives in Phoenix, Arizona with his wife and daughter. Contact him at logan DOT espinoza AT yahoo DOT com.

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