Joe Biden is already proposing the immediate cancellation of up to $10,000 in student debt as part of the next coronavirus relief package. Other Democrats, such as Senators Elizabeth Warren and Chuck Schumer, have proposed a more expansive (and expensive) cancellation of up to $50,000. But it’s hard to imagine a worse use of taxpayer dollars if the goal is to stimulate the economy in the aftermath of lockdowns.
And a substantial use of taxpayer dollars it would be. Senator Bernie Sanders, who proposed cancelling all student debt, estimated that it would cost $2.2 trillion to accomplish. For context, mailing nearly every American taxpayer a $1,200 check cost the federal government $142 billion.
Cancelling student debt would be worse than just expensive, however — it would also be ineffective. For one thing, a college education pays off. The median weekly wages for an American with a bachelor’s degree are more than 67 percent higher than what the median American with only a high school diploma earns.
The difference is even more stark for Americans with postgraduate degrees. The median American with a master’s degree earns twice as much as the median high school graduate, and holders of a doctoral degree earn more than two and a half times as much. At the same time, these Americans with postgraduate degrees have a disproportionately high amount of the outstanding student debt. In other words, student debt forgiveness is a massive handout to some of the Americans who need help the least.
That’s not just morally questionable, it’s also bad economics. The stated purpose behind student debt forgiveness is boosting the economy — self-anointed policy wonk Elizabeth Warren even tweeted that student debt cancellation is “the single most effective executive action available for a massive economic stimulus.”
Except it’s not, not by a long shot. Supporters of government stimulus spending often refer to the “multiplier,” a measure of the economic impact associated with a dollar of federal expenditure. A multiplier higher than 1.0 indicates that such spending actually generates more than one dollar of economic growth for every dollar spent. The Committee for a Responsible Federal Budget (CRFB) estimates that student loan forgiveness would have a multiplier of just 0.08x to 0.23x.
For those readers for whom math is not your forte, and Elizabeth Warren, that means that student loan forgiveness would increase economic output by far less than the amount spent. If student loan forgiveness cost $1.5 trillion, as CRFB estimates, economic output would increase by between $115 and $360 billion. Not exactly “bang for your buck.”
The reason for this is fairly simple, and goes back to those earlier statistics about who actually holds student debt. Those Americans struggling with student loan debt have a variety of repayment options available to help ameliorate their debt burden. Graduates that stand to benefit most from reduced student loan debt are those who are already making a high income.
The result is that student loan debt would not be targeted towards those Americans living paycheck to paycheck, who would likely spend any extra cash relief they received on necessities. It would go to relatively better-off college and graduate school alumni, who might appreciate the room in their budgets but aren’t in as dire need and would likely save much of it. In itself that’s not a bad thing, but when the explicit goal of this proposal is to stimulate the economy, it can only be considered a policy failure.
Hopefully Joe Biden the President-elect does not allow these loud voices to overwhelm policy sense. Americans struggling to get by and businesses barely keeping afloat are where relief and stimulus funds should be targeted, not the much richer and more economically secure demographic of college grads.
Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.