Elizabeth Warren's student debt relief plan: Could it super-charge the economy?

Published: Apr. 23, 2019 at 4:08 PM CDT
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Obtaining a college degree has become something of an economic Catch-22 in recent decades. Earning a bachelor's degree is increasingly necessary to guarantee lifelong higher earnings — but the accompanying debt can hamper a grad's ability to buy a house, a car or climb the socioeconomic ladder.

Sen. Elizabeth Warren on Monday issued a plan to forgive student debt for college grads, arguing that forgiving up to $50,000 of debt for more than 42 million Americans would "provide an enormous middle-class stimulus that will boost economic growth, increase home purchases, and fuel a new wave of small business formation."

The presidential candidate is targeting what some economists say has become a handbrake on the U.S. economy, slowing everything from home ownership rates to the creation of new small businesses. Wiping away the debt could supercharge the economy, economists say, by easing the financial burden on families and freeing up cash each month to pay for housing, health care or education for their own children.

The potential benefit for the average family could be far more than what they received from the Tax Cuts and Jobs Act. The typical monthly student loan repayment is about $400 per month, or $4,800 per year. By contrast, middle-income Americans received a tax cut of $1,000 last year from President Trump's tax overhaul.

$1.1 trillion in GDP growth

By one estimate from the Levy Economics Institute at Bard College, erasing the student debt held by Americans could boost the GDP by almost $1.1 trillion over the next decade, create up to 1.5 million new jobs per year and lower the unemployment rate by as much as 0.36 percentage points over a decade.

"Student debt cancellation results in positive macroeconomic feedback effects as average households' net worth and disposable income increase, driving new consumption and investment spending," according to the Levy Economics Institute researchers, who published their report last year.

The impact would help not only boost millennials, but Gen Xers and baby boomers who are also struggling to repay their loans. "This is an issue that affects me and so many of my friends," one Twitter user wrote. "The effect on the economy would be enormous, and not just millennials moving out of their parents houses, but Gen X folks like me who just might be able to buy a house."

A middle-class handout?

So what's not to like? Broadly speaking, forgiving student loan debt would provide a helping hand to the one-third of Americans who have college degrees. College grads tend to come from middle-class or wealthy families who have the resources to navigate the system — a trend that's deepened in recent years.

About 58 percent of 24-year-olds from families in the top quartile of income earners — or families that earn more than $124,000 per year — held bachelor's degrees in 2016, compared with 40 percent in 1970, according to a study published last year by the Pell Institute.

Poorer students are enrolling in college at greater numbers as well, but graduation rates are still lagging far below the wealthiest families. About 11 percent of 24-year-olds from families earning about $37,000 or less per year had college degrees in 2016, compared with 6 percent in 1970.

There's also a racial element, with whites and Asians much more likely than blacks, Hispanics or native students to attend college. Those trends raise questions about fairness, especially at a time when lower-income families are losing economic ground.

"Elizabeth Warren's debt relief proposal is unfair to those that didn't go to college," another Twitter user wrote.

To be sure, Warren's proposal aims to address some of those issues. She's also proposing free 2- or 4-year public college program for Americans to make "higher education of all kinds more inclusive and available to every single American, especially lower-income, Black, and Latinx students," her campaign noted. And the plan would also create some incentives for black students and lower-income families, such as a fund with at least $50 million for historically black colleges and universities.

Like anything, the devil will be in the details. Not all loan forgiveness programs have delivered the benefits they promised, such a $700 million program set up to help public servants get student loan forgiveness. It received 38,460 applicants, but only 262 people have so far been successful in obtaining loan relief.