The Real Beneficiaries of Student Loan Forgiveness

The enormous student-loan debt in the United States is old news, but it has returned to the consciousness of the American public as a campaign promise. Democratic candidates, Elizabeth Warren and Bernie Sanders have laid out their plans to save the country’s heavily indebted graduates -- and dropouts.

Warren has proposed canceling $50,000 in student debt for borrowers with household incomes less than $100,000. Those who make between $100,000 and $250,000 would also get some relief; they would be eligible for a $1 reduction for every $3 they earn over $100,000.

If Sanders would have his way, the outstanding education debt pile would be erased for the benefit of all borrowers. In addition, the Senator from Vermont also wants to make public educational institutions tuition-free.

Wiping out a significant portion of the college debt off the books would be a huge lifeline for millions of struggling American borrowers. According to Fortunly, student loans recorded higher delinquency rates than mortgages, credit cards, and auto loans nationwide, as of the last quarter of 2018.

The primary beneficiaries of broad-stroke student loan forgiveness programs would be minorities, women, and first-generation college students. These demographics tend to borrow more to finance higher education in the country and experience more repayment challenges.

On the economic level, forgiving the financial liabilities of student-loan debt holders could have numerous advantages.

Having a clean slate would enable young adults to pursue life milestones more quickly. It could spark some renewed interest in homeownership, which would increase the demand for housing. This could, in turn, increase the potential revenue of builders, mortgage lenders, and home-improvement professionals.

Furthermore, wiping away student-loan debt could keep young adults from delaying marriage. Apart from the correlated economic benefits of raising kids in a two-parent household, timely family formation is key to averting any alarming population declines in the future.

With one less bill to worry about, student loan borrowers could begin building rainy-day, emergency, and retirement funds as soon as possible. This would allow more Americans to be more capable of weathering any financial storms.

Large-scale student loan forgiveness could create more jobs too. Entrepreneurial Americans could find themselves in a better position to bootstrap their own small businesses and create more employment opportunities across the country.

Most importantly, many college students would be encouraged to chase their dreams after graduation. Research shows that indebted individuals are more likely to accept work that is unrelated to their degrees, and take jobs with limited career growth. If today’s student loans would be forgiven, more Americans could focus their energy on positively changing the world than on zeroing out what they owe.

Resetting the student-loan debt clock could really have wonderful merits, but it is definitely not a cure-all. While debt relief could make the lives of millions of financially distressed adults in the United States better over the short term, the real winners would be the schools in the long run.

If American students could go to college for free, educational institutions might choose to admit as many students as possible just to boost their profits. Schools could also develop new programs with little value to the American economy for the sake of high enrollment.

Institutionalizing free higher education in the United States might give the country a more educated labor force in the future. But it does not necessarily mean there would be more American workers with relevant and globally competitive skills.

The problem is that some politicians like to view student-loan forgiveness as a magic wand that would end a crisis to the detriment of no one. In reality, the bill would be shouldered by the taxpayers. The rich may be targeted, but the top 1% could eventually find a way to legally avoid the liability, and ultimately let the middle class bear the brunt of higher education payments.

There is no debate on whether the prevailing student loan debt situation is a serious cause for concern. Economists, however, do not agree on the right approach to solve it.

Debt forgiveness is certainly worth considering. But it should not expose American taxpayers to moral hazards.