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There’s an argument going around right now that forgiving the country’s student loan debt would have a stimulative effect on the economy. This online petition by Signon.org, an offshoot of Moveon.org, has nearly 300,000 signatures. Its basic argument is this:
Forgiving the student loan debt of all Americans will have an immediate stimulative effect on our economy. With the stroke of the President’s pen, millions of Americans would suddenly have hundreds, or in some cases, thousands of extra dollars in their pockets each and every month with which to spend on ailing sectors of the economy. As consumer spending increases, businesses will begin to hire, jobs will be created and a new era of innovation, entrepreneurship and prosperity will be ushered in for all.
The idea is also being touted by Michigan Democratic Congressman, Rep. Hansen Clarke:
So we asked Freakonomics contributor Justin Wolfers what he thought of the idea. His response is as follows:
Let's look at this through five separate lenses:
Conclusion: Worst. Idea. Ever.
And I bet that the proponents can't find a single economist to support this idiotic idea.
[HT: Diana Huynh]
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Between my wife and I, we have $200k in loans. Yes, we earn a higher income than my friends with just a HS diploma, but after paying $1600 a month in loan repayment, we’re about the same. Bc of the debt, we’re not planning on buying a house or having kids anytime soon. Obviously I want the loans wiped out, but I think Wolfers might be underestimating how much of the money would get spent if this were to pass.
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So you 200K in loans and you pay 1.6K per month. This is supposed to be economic stimulus, so we’re really only concerned about the short term effect. Let’s say 24 months. That comes out to 38.4K. That means the government has spent $5.20 for every extra dollar you MAY spend over the next 24 months. There are better ways for the government to spend money.
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Oh, I agree. There are certainly better things to spend it on.
My point is that most graduates have taken on a lot of debt. And just like the housing market is dragging down spending, so are student loans.
I mention this later, but for-profit colleges have enrollment of more than 600,000. 90% of those students are taking out the max in federal loans for a worthless degree. This is not sustainable.
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But people have to be held accountable for the debts they owe. If degrees are so worthless, why drop $200k on one? It’s the consumer’s own fault! Constant freebies and wealth transfers from the government is what’s unsustainable in the long run.
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My wife racked up $150k on a law degree (state school with residency) I have $50k in an undergrad in business (state school with non-resident) We will pay it back, eventually.
Wolfers said that student loan people wouldn’t spend much of the money. I think he underestimates how much student loans are out there. I also think he doesn’t understand the massive influx of for-profit college students. This is a huge bubble that will burst.
Society will have a LOT more poor people because of these for-profit colleges and the “let them eat cake” attitude is not going to fly forever.
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I think this economist misses the point, there is a whole generation of people (in their late 20′s and early 30′s) with established careers and families trying to pay off student loans they received in their teens and early 20′s. That is the population that will benefit the most. I would take the extra money from our loan payments and spend it immediately (or save it). Tuition is extremely high and college grads have this huge debt hanging over their heads. It will take decades (if ever) to pay off my wife and I student loans, one grueling month at a time.
Hot debate. What do you think? 15 20
Most certainly… lets give another bailout to the Banks!!! That worked! They are hoarding the money, and they are still investing profits overseas. Now that is really good for America. Did you see Dylan Ratigans Rant…
The ubers are duping us! You!
Hot debate. What do you think? 12 22
yeah, except this would have the opposite effect. Forgive people loans TO the banks. Denying banks of billions….(trillions?)
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Usually I like Justin Wolfers, but his comments reveal that he is horribly uninformed.
1) It is faulty to assume that everyone bearing student loans is a graduate. Many take on loans and still do not graduate.
2) There is a very large number of students who are not employed in their field of study because no jobs are available. They are working the same jobs as the “poor”, but in addition to their living expenses, they are paying an extra several hundred dollars per month in loan repayments.
3) Today’s young bear the burden of supporting the old. They are currently expected to pay for someone else’s retirement and their own education costs (which has increased nearly 5-fold over the past few decades) before they can put a cent toward purchasing a house or saving for their own retirement. I have a feeling that we will continue to see a depressed housing market largely because student loans are killing the kind of income stream necessary to make housing affordable.
The best argument against it is that removing future obligations to pay does little to increase short-term spending. As we saw with the last round of stimulus, it’s only effective if it takes effect quickly.
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Mike – your counterargument seems to be summed up as “yes, but there are a few people who don’t fit this stereotype.” Well, of course not everyone is the same. But if you’re going to apply a rule to everyone – in this case, all former students get their debt forgiven – then you need to look at the average student and the average situation. That’s why Justin’s comments are spot-on and all of the rebuttals focus on individual situations and individual stories.
Are there poor former-students? Sure. But there are also who racked up huge loans to pay for spring break, classes they didn’t attend, fifth (and sixth) years that could have been avoided, and luxuries that weren’t needed. If you’re going to have a blanket rule of foregiveness, you basically just stuck the taxpayer with the tab for someone’s vacations, iPods, and weekend parties to help someone else who may be the victim of circumstances.
I agree that our generation is screwed in that we have to pay for 3 generations – the baby boomers (Social Security), ourselves (401(k)s), and our children (529s). But the answer isn’t to shift student loan expenses to the government – which will only charge our generation more in taxes to defray the cost of this transfer.
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