Should We Cancel Student Debt to ix the Economy?

A 2023 analysis by the Roosevelt Institute, a progressive think tank, modeled the macroeconomic impact of canceling up to $50,000 in student debt per borrower. The study found that full cancellation would boost GDP by between $86 billion and $108 billion per year over a decade, create 1.2 to 1.5 million new jobs annually, and reduce the racial wealth gap. The report argues that debt relief acts as a direct fiscal stimulus, as lower-income borrowers have a high marginal propensity to consume, spending freed-up funds on housing, cars, and small business investment, thereby igniting consumption-driven growth.

A detailed report by the Urban Institute, a nonpartisan economic and social policy research organization, analyzed the distributional impact of the Biden administration's 2022 plan to cancel up to $20,000 in student debt. The report found that while the plan would benefit 43 million borrowers, it would disproportionately help higher-income households, with the top 20% of earners receiving about 25% of the total forgiven amount. The study estimated the cost at over $300 billion, and warned that without offsetting revenue, the policy would increase the federal deficit, potentially crowding out other public investments and adding inflationary pressure, contradicting the claim of broad-based economic stimulus.

A 2023 working paper from the National Bureau of Economic Research (NBER) examined the consumption response to student debt forgiveness. The authors, using survey data and microsimulation, found that the marginal propensity to consume (MPC) out of forgiven debt is low—around 5 to 10 cents on the dollar—because many borrowers are high-income professionals (doctors, lawyers) who save or invest rather than spend. The paper concludes that targeted transfers to low-income households without debt would generate far more economic activity per dollar of government expenditure, making blanket cancellation an inefficient tool for economic recovery compared to direct stimulus checks or expanded tax credits.

An analysis by the American Enterprise Institute (AEI), a center-right think tank, argues that student debt cancellation creates a serious moral hazard, signaling to future students that borrowing carries no risk. The report cites historical evidence from the 1990s and 2000s that government loan forgiveness programs correlated with accelerated tuition increases at universities, as institutions anticipated federal bailouts. The authors estimate that widespread forgiveness could increase annual tuition growth by 2-3 percentage points, exacerbating the root cause of the crisis. They advocate instead for structural fixes like income-based repayment caps and university cost accountability, which would address the problem without rewarding past high-risk borrowing or burdening taxpayers who never attended college.