Giving Compass' Take:

• The authors examine the effectiveness of student loan forgiveness programs as an adequate and cost-effective form of stimulus for the economy during the pandemic. 

• What would be the economic impact of canceling loan forgiveness during COVID-19 and who would benefit?

• Read more on targeting student loan forgiveness for low-income families. 

The economic crisis sparked by COVID-19 has reinvigorated a long-standing argument that forgiving student loan balances could help stimulate our wounded economy.

There are good reasons for Congress to relieve the burden of student loan payments during the pandemic, building on the six-month pause in payments included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. But evidence suggests canceling student loan balances would not be a cost-effective form of stimulus and would direct the most benefits to higher-income households. Congress can get more bang for its buck by targeting financial support to families most in need who are most likely to spend.

Forgiving student loan balances provides weak stimulus because most financial savings to borrowers show up in the future. A borrower paying off $30,000 of student loans—roughly the average amount for a college graduate—over 10 years would have a monthly payment of about $300. Forgiving $10,000 of that debt would free up $100 a month for the borrower to spend over the rest of the decade.

That long tail of payment reductions would do little to boost spending during the next year or two. Some borrowers might be more comfortable dipping into savings or taking on other kinds of debt, such as car loans and mortgages. But the immediate benefits would be modest, especially compared with sending each borrower $10,000 that can be spent right now.

Loan forgiveness is not well targeted at people most likely to spend. By definition, student debts are owed by people who attended college and, in most cases, graduated. Many of these people are struggling in today’s economic downturn.

Student loan cancelation could be more targeted by wiping out the debts of borrowers with the lowest incomes or those who rely on safety net programs. There is compelling evidence these borrowers are most likely to struggle with their loans, despite having relatively low balances. This approach may be worth pursuing, but not on economic stimulus grounds because the benefit would be spread out over a long period of time.

Read the full article about student loan forgiveness by Matthew Chingos and Donald Marron at Urban Institute.