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Want To Stimulate The Economy? Cut Student Debt–Not Taxes

The people who will put the most money back into the economy are currently weighed down by the massive costs of going to college.

Want To Stimulate The Economy? Cut Student Debt–Not Taxes
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The recently passed Republican tax cut package will cost about $1.4 trillion over a decade, according to independent figures. It’s a very expensive policy that currently is not offset by an increase in government revenue, or by spending cuts.

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Another measure would cost about the same amount and it too would be hard to justify as a deficit-busting policy. But it might have greater economic benefits, say economists. That policy would be canceling all student debt.

The contention comes from a paper from the Levy Economics Institute at Bard College, which models the macroeconomic impact of relieving 44 million Americans of what they owe for college. About 90% of the $1.4 trillion is held by the federal government. The rest is in the form of private loans.

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“This policy would be more macro-economically stimulative because of who the beneficiary is,” says Marshall Steinbaum, research director at the left-leaning Roosevelt Institute, and one of the authors of the report. “The tax cuts will go to higher income households that have a lower propensity to spend the money. We show that reducing the burden of student debt on households enables them to spend more.”

Just to be clear: the chances of the federal government actually canceling student debt is small to non-existent. No politicians that we know of have seriously proposed the idea. But economists Scott Fullwiler, Stephanie Kelton, Catherine Ruetschlin, and Steinbaum were interested to find out how it might work, practically-speaking, and what the economic impact might be.

Democrats like Bernie Sanders have proposed free college policies for future students. But less ambitious plans have been put forward for people who’ve already been to college (Hillary Clinton had a $115 billion student debt forgiveness plan that might have helped about 60% of graduate debtors). Student debt levels have jumped 150% in the last decade as tuition prices have grown far above inflation and less financial help has been available from states.

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Using two well-known models for simulating economic effects, the economists find that debt cancelation would produce a $86 billion to $108 billion per year increase in GDP. Average unemployment would fall by between 0.22% and 0.36%, they say.

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Neither result is huge (the total economy is more than $18 trillion). But the biggest impacts would likely be on an individual level, not in the economy as a whole. Without debt, graduates would have better access to credit, and a freer hand to choose careers that are stimulating rather than immediately remunerative. Student debt is often blamed for deterring graduates from forming startups because they need to start paying back their loans.

Though college has traditionally been painted as a ticket to middle-class security, economists like Steinbaum argue higher education can also be a kind of trap. It forces people to take on a large amount of debt even though there may not be jobs allowing people to pay back what they owe.”People have to obtain more and more degrees in order to get the same jobs that would have been available to them without that amount of education,” he says.

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This “up-credentialing” phenomenon, whereby the same job requires better credentials, implies that skills requirements to get jobs are increasing. But it may also be connected with an oversupply of highly-credentialed candidates looking for a dwindling number of positions. Fully 40% of recent graduates now work in positions for which they are overqualified.

“We have this big stock of student debt out there, which relates to an economic misdiagnosis of the economy as suffering from a skills gap,” Steinbaum says. Increasing numbers of economists describe the skills gap as a myth and that the bigger problem in the labor market is a lack of good jobs.

Though employers often report that they lack candidates with the right skills, there has a been steep decline in how much corporate America is investing in on-the-job training. It may be that companies are more picky about workers than they used to be, and that they are more willing for students to pick up the tab for their education and training.

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About the author

Ben Schiller is a New York staff writer for Fast Company. Previously, he edited a European management magazine and was a reporter in San Francisco, Prague, and Brussels.

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