Elizabeth Warren and Cancelling Student Debt

As the 2020 election nears and Democrats begin their campaign to take down the incumbent President Trump, the candidates are presenting their agendas to the American public. One of the most recent policy declarations was Elizabeth Warren's introduction of student debt cancellation. The idea is simple. The Massachusetts senator wants to forgive any outstanding student debt for any American citizen. The policy would be massive and have significant consequences for the U.S. economy. The effect is presented in a February 2018 report by the Levy Economics Institute of Bard College, "The Macroeconomic Effects of Student Debt Cancellation."

The student debt situation in the United States is dire. In 2011-2012, seniors graduated with, on average, over $26,000 in debt. As if the first quarter of 2016, $1.35 trillion of student loan debt was outstanding, up 40 percent from 5 years before. As the cost of education has risen by 156 percent between 1990-1991 and 2014-2015, financing education has become a necessity leading to repayments and interest expenses suppressing any extra consumption.

The premise of the report suggests that canceling the student debt would release disposable income to be deployed as consumption. As net worth grows and disposable income increases, investment and consumption would increase. Overall, the effect would be positive and the report summarizes the forecasts as follows:

  • Real GDP would be boosted by $86-108 billion or $861 - 1,083 billion over 10 years.
  • The average unemployment rate would drop by 0.22-0.36 over 10 years.
  • At its highest, job creation would be 1.2-1.5 million a year.
  • Inflation effect is insignificant, only with the highest forecasted inflation growth at 0.3.
  • The increase in the deficit-to-GDP ratio would be 0.65-0.75 percent
A bulk of the report discusses the design of the model as well as the multiple ways that the government could go about the cancellation. The two main models used are the Moody's model and the Fair model. The simulations show the results mentioned above and include some other externalities that aren't quantified:

In the end, the cancellation of student debt is still a political maneuver with unknown consequences. The model discussed in the report provides a way to visualize the potential effects of the policy, but it's important to remember that models have limitations.


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