Writing off student debt would help the economy a little, says Moody’s

Wells College, Aurora NY.

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According to Moody’s Investors Service, canceling student loan debt would give the economy a slight blow, but could cause “moral hazard” and possibly make the problem worse.

Some Democratic presidential candidates, including Sens. Bernie sanders and Elizabeth warren, have proposed debt cancellation which has exploded from $ 363 billion in 2005 to nearly $ 1.5 trillion today.

Sanders wants to make college free while Warren has proposed a billionaire tax that she says would pay to wipe out up to $ 50,000 in education loans.

However, an analysis by Moody’s suggests that the benefits at the macro level would be quite limited.

“In the near term, we expect student loan debt cancellation to provide a tax-cut-like stimulus to economic activity, contributing to a modest increase in consumer consumption and investment. households, ”wrote William Foster, the company’s senior credit analyst, and others. in a report. “The magnitude of the stimulus would depend on the extent of debt relief and the income level of recipients.”

In dollar terms, Foster cited studies showing that debt cancellation would add $ 86 billion to $ 108 billion per year to GDP over a 10-year period. Less aggressive steps to cancel some loans and restructure payments for others would amount to $ 120 billion over a decade.

In a US $ 21.5 trillion economy, those kinds of gains won’t move the needle very narrowly in the broad sense.

However, the problem of student debt and its role in increasing wealth inequality is popular on the election campaign and could bring about a fundamental change in the way higher education is funded in the United States. has a disproportionate impact on young people and led to a variety of legislative proposals to tackle the problem.

Other benefits would include more money freed up for the formation of households and small businesses.

Moody’s warned, however, that the measures currently under discussion could end up being counterproductive.

“In the longer term, debt cancellation could lead to improved formation of small businesses and households, as well as increased home ownership,” Foster wrote. “However, it could also increase the risk of moral hazard and the accumulation of even higher debt for students.”

Prospective borrowers, for example, might be encouraged to take on large loan balances on the assumption that their debts will be canceled at some point.

It is also unclear to what extent forgiveness would resolve wealth inequalities. The New York Fed estimates that about two-thirds of outstanding debt is currently held by the top half of employees.