Democratic presidential candidates Elizabeth Warren and Bernie Sanders have both proposed eliminating either most – or all – of Americas’ student loan debt burdens, proposals that have been met with some criticism over potential costs.
But how would the policy actually impact the U.S. economy?
According to researchers from Moody’s Investors Service, the proposals would have both positive and negative effects on the economy – the scopes of which would largely depend on the specifics of the plan enacted, including how it is funded.
On the plus side, researchers expect eliminating student loan debt to provide a similar boost to economic activity as a tax cut, producing a near-term, modest increase in household consumption and investment since people may have more disposable income.
However, the effects of totally canceling student debt – as proposed by Sanders – will be “partially diluted” since those with higher debt burdens tend to have higher household incomes. These people are more likely to stash away their savings than spend it, according to the study.
Researchers note other positive, longer-term effects could be higher levels of both household and small business formation.
On the flip side, a one-time forgiveness act could create a “moral hazard,” causing future borrowers to take on more debt because they expect it to be canceled.
Universal student debt forgiveness would increase the U.S. government’s debt burden by about 0.4 percent of GDP without offsets for lost revenue, according to Moody’s. Debt would also be increased if the U.S. purchased the roughly $402 billion worth of privately held student loans.
The fiscal deficit could widen to 6.7 percent of GDP by 2029 due to annual net losses in revenue as it foregoes debt service on outstanding federal loans.
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