What could happen to the economy if Biden canceled the majority of student loan debt?
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Senate Minority Leader Chuck Schumer caused a stir earlier this month when he stated his hope for President-elect Joe Biden’s administration to forgive $50,000 of federal student loan debt for the majority of Americans. Such an idea endorsed by a major moderate party member like Schumer was practically unthinkable just a few years ago, but the most surprising element was the senator’s assertion that it could be done by executive order within the first 100 days of Biden’s presidency.
The ability to institute such a sweeping stimulus—there is currently more than $1.7 trillion in federal student debt—with the flick of Biden’s pen is huge, because a Republican-controlled Senate would almost certainly not pass it as legislation through Congress. Democrats have a chance to win the majority if they capture both seats in Georgia’s upcoming runoff elections, but that’s far from guaranteed. If they don’t succeed, Biden will have to rely on executive action to carry out most of his governance.
In September, Schumer and Sen. Elizabeth Warren unveiled a resolution arguing that the president has existing executive authority to cancel student loan debt thanks to the Higher Education Act of 1965. A passage in the legislation states that the president-appointed Secretary of Education can “compromise, waive, or release any right, title, claim, lien, or demand,” which, the senators say, includes student loan debt. Some legal scholars say utilizing this provision could survive a challenge in the courts, especially because it’s unclear who would actually bring a case to sue. Whoever did would have to demonstrate harm from not collecting this debt, and few could make that argument.
In an op-ed published in the Washington Post this month, Warren wrote that canceling student loan debt would give tens of millions of Americans an economic boost and help narrow the racial wealth gap, making it “the single most effective executive action available to provide massive consumer-driver stimulus.”
Biden endorsed $10,000 in student loan forgiveness while on the campaign trail earlier this year, but has not offered any public support of Schumer and Warren’s $50,000 plan. When asked about it recently, he declined to comment and instead pointed to the House-passed HEROES Act, the second coronavirus stimulus package that currently lies dead in the water due to Republicans and Democrats in the Senate unable to compromise on a deal.
But the fact that a staunch moderate like Schumer is now in support of such a plan suggests a growing possibility that Biden would consider the executive order. If he did, would the economy really flourish, reducing the racial wealth gap, as Warren insists?
That was the subject of a 2018 paper “The Macroeconomic Effects of Student Debt Cancellation,” authored by a group of economics professors working with Bard College. In a simulation using a one-time total student loan cancellation policy including federal and private loans, the researchers found the macroeconomic effects included:
- an average GDP boost of $86 billion to $108 billion per year
- a reduction of the average unemployment rate by 0.22 to 0.36 percentage points over a 10-year forecast
- roughly 1.2 million to 1.5 million newly-created jobs per year in the first few years following student debt elimination
- modest rises in the Federal Reserve’s interest rates
“Research suggests many other positive spillover effects that are not accounted for in these simulations,” the authors added, “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.”
There are a couple of caveats to these findings, though. This particular simulation forgave all total debt rather than just $50,000 per borrower (though it’s worth noting around three in four Americans have less than $50,000 in student debt), and it assumed that the federal government took over the financing of privately-owned loans on the behalf of borrowers, while Schumer and Warren’s plan is just limited to federal debt. But the researchers noted that “our results provide a conservative estimate of the macro effects of student debt liberation,” so there may be some semblance of balance there.
When it comes to the racial wealth gap, research suggests that eliminating student debt can be beneficial even if not done with a full-scale one-time policy like the Bard simulation. A 2015 study conducted by the left-leaning Demos think tank found that eliminating student debt for all households would actually increase the median racial wealth gap by 9% because white families have a higher likelihood of completing college and graduate degree programs at a higher percent.
Instead, Demos proposed eliminating student debt only among low-wealth households making less than $50,000 a year. Demos found that such a policy would reduce Black-white wealth disparity by nearly 37% among low-wealth households. And taking it a step further by eliminating debt for households making $25,000 or less would reduce the Black-white wealth gap by a staggering 50%.
This income disparity among student-loan borrowers has been one of the main criticisms of a sweeping debt cancellation policy. Essentially, people who have the most debt tend to complete college or graduate programs and go on to earn higher income as a result. Critics argue that those borrowers are in lesser need of debt forgiveness, which could add to the wealth gaps outlined above. Should Biden attempt to push forward with student debt cancellation, he will have a number of choices available to him. Limited forgiveness with a cap on income could present a middle-ground compromise that ensures those who need debt cancellation the most will benefit.