graduates

Outstanding student loan debt totaled $1.35 trillion as of the first quarter of 2016 — an amount 28 percent greater than all motor vehicle loans in the United States.

Photo: Faustin Tuyambaze

A program of outright student debt cancellation financed by the federal government could have significant benefits for the U.S. economy, according to a new report from the Levy Economics Institute of Bard College.

According to the institute, outstanding student loan debt totaled $1.35 trillion as of the first quarter of 2016 — an amount 28 percent greater than all motor vehicle loans in the United States.

Mounting evidence that the explosive rise in student debt burden is having spillover effects on the economy — from small business formation to new home buying, and even marriage and reproduction — has prompted policymakers, educators and students to call for a range of solutions.

The institute, in its report released this week, explored the macroeconomic impacts of one of the boldest of these proposals —student debt cancellation.

In the paper, “Research Project Report, The Macroeconomic Effects of Student Debt Cancellation,” Levy research associate Stephanie Kelton and economists Scott Fullwiler, Catherine Ruetschlin and Marshall Steinbaum examine the context, implementation and outcomes of a one-time program cancellation.

“There is mounting evidence that the escalation of student debt in the United States is an impediment to both household financial stability and aggregate consumption and investment,” the authors wrote, stressing increasing demand for college credentials coupled with rising costs of attendance have led more students than ever before to take on student loans, with higher average balances.

“This debt burden reduces household disposable income and consumption and investment opportunities, with spillover effects across the economy. At the same time, the social benefits of investment in higher education — including human capital accumulation, social mobility and the greater tax revenues and social contributions that flow from a highly productive population — remain central to the economic advantages enjoyed by the United States.”

Using two macroeconomic models, the Fair model and Moody’s model, to forecast the effects of debt cancellation over a 10-year horizon, the researchers found cancellation results in an increase in GDP, ranging from $861 billion to $1,083 billion over the entire period, or on average between $86 billion and $108 billion per year.

The increase would be accompanied by new job creation that peaks at 1.18 to 1.55 million additional new jobs per year, or 50 to 70 percent of the entire job creation for a typical year in the 2010-15 economic expansion.

Average unemployment rates over the period would be reduced by between 0.22 and 0.36 percentage points.

The effects of the cancellation on inflation, meanwhile, would be negligible, the authors wrote, with a peak of 0.3 percentage points of additional inflation in the Fair model and negative pressure on inflation in later years, and no more than 0.09 percentage points of additional inflation in the Moody’s model over the entire period.

The researchers’ simulations suggested only a modest impact on the federal deficit — ranging from 0.29 to 0.37 percent of GDP, while state budget positions improve.

“We find that student debt cancellation produces positive feedback effects that improve several macroeconomic variables, including GDP and job growth, while imposing only moderate increases on the federal deficit and interest rates and no significant inflationary pressure,” they wrote. “These results support the continued inclusion of bold proposals such as student debt cancellation in public policy deliberations surrounding the future of higher education in the United States.”

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