Student Loan Forgiveness
Audio & Video12

Student Loan Forgiveness

An Economist's Analysis

Originally published on »

Just a few months before the midterm elections, President Biden announced a plan to forgive up to 20 thousand dollars in student loan debt per borrower. And while the beneficiaries are obvious, the costs are more hidden. And any analysis of student loan forgiveness has to consider both of those.

I’m Cameron Harwick, professor of economics at SUNY Brockport. Let’s break it down.

In economics, there are two steps to analyzing a policy. First, the static analysis. Who benefits and who loses just from the policy itself, and are the benefits worth the costs? And second, the dynamic analysis: How do people change their behavior in response to the policy, and do they change it in productive or unproductive ways?

Let’s start with the static analysis. Who benefits from student loan forgiveness? Well, the entire point of the program is to benefit former students who have borrowed lots of money for school and haven’t paid it back yet. So it’s no surprise that a big chunk of the support for this program comes from highly educated people. But those benefits doesn’t come for free. If these borrowers are able to consume more, someone has to consume less. So who is that?

That’s gonna depend on how the forgiveness is funded. If the government raises taxes to pay for it, then taxpayers take the hit. If the government borrows the money, then that absorbs saving that could have gone into productive investment, so you and I pay in lower productivity today, and future taxpayers are still on the hook later. And finally, if the government convinces the Federal Reserve to print money to pay for it, as they did for the Covid stimulus checks, then money-holders throughout the economy pay for it in inflation, with each dollar now going less far than before.

In all three of these cases, what we have is a transfer from broad segments of the economy – taxpayers, consumers, or money holders – to benefit a relatively narrow segment. And the average student loan borrower is already in a better position than the average taxpayer, consumer, or money holder. Even if borrowers have lots of debt, that education is still a valuable asset. And when you consider the value of that education in terms of the income boost it gets them, student loan forgiveness turns out to be a transfer of wealth away from relatively poorer segment toward a relatively richer segment – exactly the opposite of what government transfers are usually supposed to do.

Now let’s talk about the dynamics. A simple transfer is one thing, but people don’t stand still when you change their incentives. What kind of behavior does loan forgiveness reward or punish? Well, students who paid back their loans already don’t see any kind of benefit from this policy. The people who benefit the most are people who put off paying back their loans as long as possible.

One important principle in economics is that if you incentivize something, you get more of it. In this case, loan forgiveness can incentivize more borrowing in anticipation of future forgiveness programs, and discourage loan repayment. And as we saw during the 2008 financial crisis, when borrowers and lenders expect to be protected from the consequences of mistakes, you get a lot more mistakes. In this case, that might look like more students choosing fun majors instead of productive majors with a good job on the other side. Or taking longer to graduate, continuing to borrow instead of getting a head start on creating value in a job.

Now college does do lots of things besides just making you more productive. Personal growth and expanding your horizons are important, and beyond that, college is fun. And of course it might make sense for taxpayers to invest in people being more productive, since that potentially benefits everyone. But does it make sense for taxpayers to be on the hook for all these other things, as great as they are? What the Student Loan Forgiveness Program does is incentivizes students to think of college less as a productive investment that benefits everyone, and more as a private consumption good that just benefits the student.

So ultimately, it’s hard to see much benefit to student loan forgiveness, either from a static or a dynamic perspective. Not only is it a transfer from relatively poorer to relatively richer people, but it also incentivizes unproductive behavior in a variety of ways that, far from solving a crisis, likely sets us up for another crisis in the future.




Facebook Twitter Reddit Threads


  • 1

    Sum1 Better

    Feb 17, 2023 at 18:33 | Reply

    Definitely agree. I am one that would benefit but it seems that it would cost more people than it helps. Too socialistic for my taste

  • 2

    Ikol Nedu

    Feb 17, 2023 at 18:47 | Reply

    as an alternative, specially if the Student Debt Relief plan does not push through, why not make the debt payments as TAX DEDUCTIBLE instead.let’s say you paid $6k to your college loan for the year and you’ll need to pay $10k for taxes, so that means you’ll pay only $4k to the IRS.

    In this way, there is no need for congress to discuss how much budget to allocate for student debt forgiveness every year.

  • 3

    Angel Arellano

    Feb 17, 2023 at 19:08 | Reply

    Colleges just need to lower the cost of tuition. A lot of the money isn’t even going to the professors that teach the students who take out the loans!

    • 3.1


      Jul 03, 2023 at 20:01

      Good idea..but show us how?

  • 4

    Tom Ulrich

    Feb 27, 2023 at 1:45 | Reply

    So, this loan forgiveness boondoggle will cost over $400 BILLION dollars. That is $1204.82 for every man, woman and child in the US. Since only half the population pays income tax, that is over $2400 per taxpayer. All this to buy votes from people who took out student loans to attend college and may or may not have earned some worthless degree with our money.

  • 5

    George Ramon

    Feb 27, 2023 at 14:11 | Reply

    BUNCH OF SHIT! This guy is just reviewing the taxpayers peoples money

  • 6

    Eric Johnston

    Mar 03, 2023 at 20:48 | Reply

    Anyone suggesting hard working tax payers should pay their hard earned money to “forgive” student loan debt should be rounded up and deported. Straight up. Every problem in the west comes from these same people trying to get more for free and take more from those who produce. Get out.

  • 7


    Mar 13, 2023 at 6:16 | Reply

    I think this makes sense but without taking in to account the racial or native aspect it makes no sense. The reality is any economic decision made will have positives and negatives. We just gave 300 billion to Ukraine. That coming straight from the tax payers so as a person who studied economics I would have to disagree are we concluding that economic stimulus are bad. Your ok with tax payer money going to other countries. I think as an economist you should be more willing to point out the same issues when we throw money at foreign government. At the same time your trying to control how much money circulated demonestically as if your just creating and incentives game to get people motivated to do jobs that could be automated if we invested in education and our own citizens we wouldn’t be bringing people from other countries to do the jobs we can do. Economist have a hard time understanding that they can’t look at things in a vacuum. If anything this guy should be opposed to ant economic intervention as there are people who benefit and people who don’t. Most of the time the workers. Sticky wages with high inflated prices that don’t go down. They tend to raise because the media more so then any supply or demand issue. All lot if stuff really just be people playing game and hustling. If it pass or not someone benefits and someone worse off. Particular groups were also targeted with those loans. Told those kid to go to college when the education they was getting wasn’t good enough for them to be in college. The how things a scam and if you are going to talk about the money then clarify demographically socially etc who benefits instead of not pointing our the truth.

    • 7.1

      M S

      Jun 30, 2023 at 21:34

      It is not about sum of money. It is about encouraging wrong behavior

  • 8

    Michael Joseph Vertucci

    Apr 18, 2023 at 15:27 | Reply

    Outstanding Evaluation!

  • 9

    Ben Jamin

    Jul 14, 2023 at 22:24 | Reply

    The only way that would be fair to pay it is to give people that didnt go to college a basic income of let’s say 5k a month and since I’m a high school dropout give me 6k a month tax free of course I dont need it though since I have no debt didnt even finance my home can go about 10 years without a paycheck and still pay all my bills and living expenses and some shiny precious metals buried in the ground I think we need to make up for the fact that I just dont make as much money as the low IQ educated people just a great saver

  • 10

    Summum Bonum

    Jul 15, 2023 at 3:17 | Reply

    Education of society doesn’t seem to be an investment in the eyes of this guy.

Leave a Reply

More Content