Does Forgiving Student Debt Make Sense?

Credit & Debt

We often talk a lot about student debt and share solutions we think might work. We constantly throw out the numbers. 44 million Americans owe around $1.53 trillion in student loans. Many 2020 candidates are already standing on the platform demanding debt reform for students who are drowning.

The one thing we always ask ourselves in the standard of fairness: does forgiving student debt make sense? Is it the right move? Of course, if you have student debt, you’re more inclined to receive the help. Many others, including President Trump, don’t think that taxpayers should be on the hook if you decide to go to college.

We can look at both sides of the political aisle and see which ideas makes the most sense of all Americans. It’s the data that makes the final determination. According to research from the National Bureau of Economic Research, it does make sense to forgive student debt. They looked at a number of different criteria.

Forgiving Student Debt

There is a lot of great data out there from the past several years. We’ve seen a number of these big schools go down, as well as lawsuits from students to get their loans wiped away. Many of these students feel they were defrauded during the Great Recession and should have their loans forgiven. Many of them won their cases.

One big instance was National Collegiate. This company held over 800,000 private loans that totaled over $12 billion. The National Bureau of Economic research also looked at credit reports. In conclusion, they found the same, that there are “benefits of intervening in the student loan market to reduce the consequences of debt overhang problems by forgiving student debts.”

There are four key benefits that ultimately improved the quality of life for the borrower. The first was the person was able to increase their overall consumption. This means they had more money in their pocket to buy stuff. That’s great for the economy when you consider the 44 million people in debt and how much that is currently hindering economic growth.

Forgiving their student debt also lowered their overall debt by 26% and didn’t default on other loans as a result. They even found they were freer to find greater job opportunities. They didn’t feel forced to take the first job that came alone in order to keep up on their student debt. They had the time to find the right career path for them.

Psychological Benefits to Debt Forgiveness

“The thing that was interesting about this study is that the people that got the forgiveness weren’t paying anyway, so it actually did not change their monthly loan payments at all,” Ben Miller, the senior director for post-secondary education at the Center for American Progress, told Yahoo Finance. So “it suggests there might be some sort of psychological benefit to this relief that goes beyond the household balance sheet. That to me is really interesting because it suggests that there may be external benefits to debt relief that you don’t otherwise see.”

In a lot of ways, debt is a part of life. The vast majority of us cannot afford to walk onto a car lot and throw down cash to buy whatever car we want outright. No, we take out an auto loan. Same goes with buying a house. We either choose to rent or take out a mortgage which can take 30 years to pay off.

“We find that consistently across all debt categories, and both with and without county-month fixed effects, the treated borrowers are significantly more likely to reduce the number of accounts,” the researchers wrote. “Overall, these findings suggest that treated individuals are significantly more likely to reduce their leverage after the debt is discharged.”

Last modified: May 13, 2019