Could the student debt crisis lead to a recession? -Quartz

0

The Biden administration faces a conundrum as rising prices and Russia’s invasion of Ukraine threaten the US recovery: how to stimulate the economy without further stoking inflation.

The president could find a solution in one of his own campaign promises. Joe Biden’s promise to forgive some student debt could be one of the best ways to avoid a recession in the next two years without fueling prices today.

In an economy made more fragile by supply chain problems and disruptions from war, the added burden of student debt has the potential to trip up borrowers and trigger a recession. Although the federal government extended its pause on student loan repayments earlier this month, starting in August, 43 million Americans will again have to munch on the dollar1.6 trillion they still owe.

Canceling this debt entirely would almost amount to a second US bailout. Suspending refunds, which the federal government did at the start of the pandemic, has already saved consumers nearly $200 billion, according to a study released in March by the Federal Reserve Bank of New York. And in the long run, eliminating debt altogether would allow Americans to start new businesses, move to different parts of the country, buy cars and homes and have families, said JW Mason, an economist at the John Jay College.

As Biden suggested to Congress to cancel the debt, legal scholars think he could do it himself by executive order. “The benefits of student debt forgiveness are going to be spread out over many years,” Mason said.

More immediately, however, this is unlikely to lead to more expense and higher prices. Since people haven’t made payments in the past year, their day-to-day finances are unlikely to change.

Who Should Get Student Loan Forgiveness?

Some economists say canceling federal student loans would create “moral hazard” — that people might borrow recklessly expecting the government to cancel their debt. But without a degree, it’s hard for many young people to compete in the job market, Mason said. “Are you worried that people are consuming too much education?” said Mason. “It’s not something we should be worried about.”

Since most student borrowers owe a modest amount—the medium a bachelor’s debt is around $29,000 – forgiving even the $10,000 that Biden envisioned would have a significant effect. But Mason says the government should write off all student debt, even for people who owe a lot. “It’s economically destructive to have people with big student debt,” he said.

Requiring borrowers to demonstrate eligibility would also be less effective than a blanket policy, Mason added.

“People have different debts from different institutions, different degrees from different lenders,” he said. “Something that may seem very simple like ‘let’s write off $20,000 of your debt’…will not be so simple when you try to implement this policy.”

Share.

Comments are closed.