I’ve gotten several calls in the past few months about the idea of student loan forgiveness as a stimulus to the economy. The Consuming Interests blog of the Baltimore Sun has aired an interview that should be sufficient to kill the idea (HT: Tim Ranzetta).*
Mark Kantrowitz, publisher of FinAid.org, crunched some numbers. Kantrowitz says there is $730 billion in outstanding student loans… But to have an immediate impact on the economy, Kantrowitz notes, you have to consider only loans that are in repayment because that’s money now going to loans and not other consumer spending.They also included a vote after the story, and when I checked, the votes for the questions “Do you think student loans should be forgiven to stimulate the economy?” Were 485 "Yes" to 163 "No." (Another 34 voted “Only Mine”). This tells me one of two things. Either close to three quarters of the voters can’t read, or there is a strong tendency to simply take a pre-existing agenda, and relabel it as “stimulus.” And why not, it worked for Congress.
But a little less than 4 percent of outstanding debt — or $28.8 billion a year —is now being repaid, Kantrowitz says.
“So assuming that the borrowers would spend this windfall instead of saving it or using it to pay down other debt, this proposal would involve the government spending $730 billion now in order to increase consumer spending by $28 billion… it will clearly not have the “immediate stimulating effect” claimed by the proposal’s proponents.”
Kantrowitz adds: “Forgiving all debt provides a financial windfall to borrowers who are capable of making their monthly loan payments, such as wealthy doctors and lawyers, and not just to borrowers who are experiencing financial difficulty. There are more effective and better-targeted ways of spending taxpayer money.”
*For the record, I have thousands of dollars in student loans. Even though I personally would benefit greatly from it, I think student loan forgiveness would be terrible public policy.