Student Debt Cancellation a Viable Option, Economists Say
A new in-depth study on the consequences of cancelling all student debt in the US shows that it would help the economy far more than it would cost. We talk to Stephanie Kelton, one of the study’s co-authors
SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries coming to you from Baltimore. Student debt is currently the fastest growing form of debt in the United States. More than 44 million Americans owe a total of $1.4 trillion. This is more than is owed on all credit cards or on all other loans. It’s the second highest form of household debt after mortgage debt. Last month, Trump’s Department of Education, under the leadership of Betsy DeVos, said that they will issue a rule to the states prohibiting them from regulating student debt collection agencies. In other words, the idea is to make it easier for debt collectors to go after students.
In contrast, the Levy Economics Institute of Bard College released a new study examining the economic consequences of canceling all student debt. According to the study, such cancellation would have a tremendous economic benefit that would far outweigh its costs. Joining me now is one of the authors of the study, Stephanie Kelton. Stephanie is a professor of public policy and economics at Stony Brook University. She’s also the former chief economist on the U.S. Senate Budget Committee and economic advisor to the Bernie Sanders 2016 presidential campaign. She joins us today in our Baltimore studios. Stephanie, great pleasure to have you here.
S. KELTON: Very nice to be here, thank you.
SHARMINI PERIES: Stephanie, the fact that 44 million Americans owe a total of $1.4 trillion in debt, is that a crisis for the United States? Is it an economic problem?
S. KELTON: Well, it is for many of the people who are struggling to repay student loan debt. It’s a kind of a mixed bag because there are people who didn’t borrow a lot and they ended up getting good jobs when they graduated college, and they’re paying back their student loans and it’s not really creating a lot of dislocations for them. On the other hand, there are people who borrowed a lot of money, didn’t do well in the job market, didn’t have that kind of success, are having difficulties repaying. Maybe they’re in some form of workout to try to repay the loans. Maybe they’re delinquent, they’re past due, maybe they’re already in default. Maybe they’ve moved back in with their parents in order to try to make payments on their student loans. So it’s a mixed bag but for the economy as a whole, there are a whole lot of people out there, including a number of economists, who believe that student debt poses a real kind of financial crisis for the economy as a whole.
SHARMINI PERIES: But it is also an opportunity, the cancellation of the debt. The study you were doing at the Levy Institute is something that is unheard of here in the United States in terms of debt cancellation. Tell us a little bit about the findings of the study and what it recommends.
S. KELTON: What we did was just ask a hypothetical. We didn’t start off … and the paper itself isn’t really a policy recommendation. We just sort of asked the question: I wonder what would happen? We said, look, there are 44 million Americans who are trapped with student loan debt today. What if they didn’t have that student loan debt? What if they didn’t have to repay it? What if it could somehow just be eliminated, canceled, wiped away, and they had a clean slate? What do you think would happen to the economy? What would be the economic impact of that?
What we did was work with some macroeconomic models, and we ran some simulations and the models answer the question, what would happen? You know, the findings, I don’t think are all that surprising. If you talked to someone who had student loan debt and you said, “How much do you pay every month, take out your checkbook and you write that check and you’re paying back your student loans, how much do you write that check for?” The average for students today who are paying back student loans, that are between the ages of 30 and 40, they’re writing a check for $351 a month.
If you told them “Suppose you didn’t have to do that, you could keep that $351 a month. What would you do with it instead?” I think that most people would understand that the answer would be something like “Well, I’d buy something else. I would spend a little bit more going out to eat. I might replace that with a car payment. I might move out of the basement and get an apartment. I might upgrade my wardrobe, which … I haven’t had a pair of new shoes or new clothes in a long time.” I mean, you would get answers like that, right? People would tell you that, overwhelmingly, with that freed-up disposable income, they would find other ways to spend it.
What happens is if you’re servicing student loan debt, the money is just going essentially to paying down your debt, that doesn’t do any good for the economy. It’s not creating any new jobs. It’s not stimulating demand by getting new consumption spending. But if those people instead had that money available to turn around and spend it into the economy, then you would see new demand. Businesses would see new customers. They would say, “There’s more demand for the stuff that I produce, maybe I should hire some more workers. Maybe I should expand my capacity.” So what we find in the paper is that that’s exactly what happens. By eliminating or canceling the $1.4 trillion in student loan debt, you free up enough disposable income to generate a significant boost to consumption spending that then bleeds over into other forms of spending. Businesses respond by hiring and investing more, and so the macroeconomic effects are pretty substantial.
SHARMINI PERIES: So then what do you say to the companies, the banks and the credit companies? Taylor Hebden, who is behind the scenes here right now, she was saying she pays that $320 a month on her student loan but they’re charging her 13% interest. Now, they would be against your plan, or the findings of your study about student cancellation-
S. KELTON: Well, I’m not so sure they would and here’s why. Most of that outstanding $1.4 trillion is owed not to private loan servicers but to the federal government, okay? But a non-trivial amount is money that students borrowed from private lenders. Some of that is government-backed, government-guaranteed, and some of it is not. What we did in the paper is say, “We’re going to eliminate all of it but the government takes the loss on the portion that it holds.” So a little over a trillion, the government just basically says “Don’t pay it back,” and for the rest of it, the privately held debt, the government takes over the payments on behalf of the borrowers. So she’s going to have her loan payment picked up by the federal government. They’re going to take over the interest payments and the principal payments for the lifetime of the loan.
So when you say, “I don’t think the private lenders would be too excited about this,” I’m not so sure, because many of these loans are in default. They’re scrambling and spending money to try to track down borrowers and harass them and get paid back right over time. Now, some of them like that because they can assess penalties and extra fees and layer on additional costs just by having access to people who can’t afford to pay back their loans. But they’re also going to get paid back on a lot of loans that would otherwise default and they may never get paid back. So I don’t know, I think they might actually like the idea of having 100% of the people who they lend money to eventually pay it all back.
SHARMINI PERIES: So then why is the Trump administration issuing this rule to states asking them not to pass any restrictive legislation on debt collectors?
S. KELTON: Well, for the reasons that I alluded to, that they make a tremendous amount of money off of people who have difficulty repaying their student loan debt. You start off owing $30,000, let’s say. But by the time you have a few missed payments, you’re late, the fees they start assessing and then penalties and next thing you know, I’m not kidding, some number of years down the road, you owe 80, $100,000. You started off with $30,000 in student loan borrowing and now it’s tripled in size because of the additional money that they’re able to extract from people who have trouble.
SHARMINI PERIES: Now, in terms of politics, this would be a very favorable position to adopt. The Democratic Party and even if you’re running as a candidate … I’m sure you’re the most famous professor on campus [inaudible 00:09:07. I mean, this could be a very popular position for candidates and politicians to take up. Why the resistance?
S. KELTON: Well, I don’t know that there is resistance. I just don’t know how many people have considered anything this ambitious. Lots of politicians, frankly on both sides of the aisle, recognize that student loan debt is a problem and it’s something that politicians are looking to address in some way. I haven’t seen anybody do anything this ambitious. You hear all the time, people will introduce legislation to say there’s no reason that students should be paying back loans at higher interest rates than what the Fed lends to the banks or something, so we should lower the rates that we charge students. We should make it easier for them to get out of these loans.
Income-based repayment programs are kind of a popular thing, where you say we’re going to collect back money for a period of time but it’s going to be based on how much you earn and then after a certain number of years of paying it back, we forgive the rest of it. So there are programs … Public service, if you go into public service employment, you work for the federal government, you can get into one of these loan forgiveness programs of this kind. So it’s not that loan forgiveness is completely anathema and nobody will touch it, there are various schemes. I don’t know anyone who yet has looked at just canceling all outstanding student loan debt, wiping the slate clean.
It does seem like it would be the kind of thing that could be popular because you’ve got a demographic of 44 million people who are touched by this, and that’s directly touched. That is, they have student loan debt themselves. But then figure the loved ones, the parents, the grandparents, aunts and uncles, who have co-signed who are watching their loved ones struggle to pay back debt and you’ve expanded the population of people who are impacted by student loan debt probably up to around 100 million Americans. So as an issue that a politician could take and say “I’m going to address this,” you’re going to hit a lot of people’s lives directly or indirectly with this. So I can imagine it having broad appeal. Our report came out, it’s gotten a lot of attention, I think, on the Hill including. I think we just have to wait and see whether anyone in the House or Senate has ambitions to think that boldly about how to address the student loan problem.
SHARMINI PERIES: If this is implemented, what prevents students from taking out as much loans as they can, knowing that it’s going to be forgiven?
S. KELTON: Yeah, economists call that moral hazard. That’s one of the problems that we talk about in the paper. The only way this would really make sense is if you fold this into a broader approach to college education, to higher education in this country. If you were to cancel all outstanding student loan debt today but do nothing else, then immediately you start running up the clock again tomorrow. Students begin borrowing the finance college expenses again and 10 years down the road, we’re right back where we are today. So that wouldn’t be a very good policy.
What we’re imagining is that this is kind of like a hitting of the reset button, at a time when you’re transitioning to making public colleges and universities tuition-free. If you do both things in tandem, then it makes more sense, right? Because you’re eliminating the tuition payments that students incur when they go to college in the first place and you’re saying, “We’re resetting the debt clock. We’re at zero, and we’re making public colleges and universities tuition-free,” and then you try to make it more manageable for students to attend university.
SHARMINI PERIES: Did you do any comparisons with countries that do have free education, higher education, available and what that would mean in terms of the economy?
S. KELTON: We didn’t in this research paper. I did some of this for the Sanders campaign and some when I was working in the Senate office when we were working on the College for All Act that he introduced. We did look a little bit at that time at what other countries do in terms of how they deal with any student debt problem that they have. In some cases, you had countries where public education was tuition-free, Germany for example, and then they transitioned away from that. They started charging tuition, student debt becomes a problem, there’s a backlash and an outcry, and the decision is made to return to making public colleges and universities tuition-free. We learned some lessons about what the UK, for example, is doing in terms of income-based repayment and that sort of a thing, but not in this paper.
SHARMINI PERIES: Right. I remember in Germany when it was not only did they cover the cost of higher education but they actually paid a stipend for students to go to college.
S. KELTON: See, I don’t remember Germany being among those countries, but Finland, I recall, offering a substantial stipend. So not only can you go to college for free, and that included professional degrees and advanced study, not just the four-year, but they would pay you a stipend that was sufficient to cover your living expenses as well, which is why you don’t have the student debt associated with the entire college experience.
SHARMINI PERIES: Stephanie, let me go back to a point you made earlier, which is that this a bold new idea. Is it in fact the case that in the United States they have not considered debt cancellation for students in the past?
S. KELTON: Well, when you say “they have considered,” who do we mean? Do we mean-
SHARMINI PERIES: The legislators in Washington.
S. KELTON: Do you know something? I don’t know. The person that I think we all heard talk about this in 2016 was the Green Party candidate, Jill Stein. That’s the closest I’ve heard, I think, to an aspiring politician, let’s say, talking about canceling all outstanding … At that time, it was $1.3 trillion. It adds up quickly. But I’m not aware of anyone on the Hill, elected official, who’s talked about or introduced legislation to do anything this ambitious.
SHARMINI PERIES: That seems remarkable. Why do you think that is?
S. KELTON: Well, because it’s so audacious. I mean, I don’t know that anybody has thought through … Certainly Jill Stein had not thought through the mechanics of how to actually do this, and that’s a big part of what we do in this paper. It’s a 75, 80-page paper. It’s got some very wonky bits, lots of balance sheets and description of the mechanics because when she was proposing this, she sat down in some interviews and I remember her being asked “Exactly how do you go about doing this?” She didn’t have the answer to the question.
She said, “Well, it’s like what the Fed did with QE, quantitative easing.” I think at one point she said “It’s sort of magic. You just poof and it disappears,” and that is not actually how you go about it. It’s really a lot more nuanced than poof and it’s gone. You’ve got to be able to trace through the balance sheets and the mechanics and explain how do you get the student loan debt that currently resides on the balance sheets of 44 million people moved off of their balance sheets, put somewhere else, who absorbs the losses? How does it actually work? That’s what we did in this paper, but I don’t know that anybody currently elected has thought to go that far.
SHARMINI PERIES: You would think this is something that the student movement would take up in a big kind of way, but yet they haven’t. I know that there are people in the movement who are talking about student debt cancellation but it really hasn’t taken root. Why is that?
S. KELTON: Well, I don’t know that they’ve had a partner. I don’t know that they’ve had a blueprint. In a sense, this paper serves as that blueprint. Now, we, again, we didn’t right the paper to promote the policy. We wrote the paper as an intellectual experiment. What would happen? We were curious. But now that we’ve done the work and you’ve got a document in place that traces out not just the economics, not just the cost and the impacts of it, but the mechanics of how to actually go about doing it, I think what we’re seeing is some groups like Strike the Debt and other student groups who are beginning to latch on to this as a document and say, “This is how to do it. This is what we want, and this is how to go about doing it.”
SHARMINI PERIES: Right. Stephanie, that’s incredible, what you’ve done here with your colleagues. I congratulate you and thank you so much for coming on The Real News Network and talking about it. I’d like to keep this conversation going and feed the student movement and the people in the movement who want to fight this issue in terms of debt cancellation and to the legislators who are out there and the politicians who can put this on their platforms. I think it could really take off, so hope you’re part of that with us.
S. KELTON: Thank you so much.
SHARMINI PERIES: Thank you. Thank you for doing the paper, and thank you for joining us here on The Real News Network.