4 reasons why forgiving U.S. student debt makes sense

The student loan system is $1.5 trillion mess that has attracted a ton of attention from policymakers to presidential candidates, with Sen. Elizabeth Warren (D-MA) proposing to cancel large amounts of outstanding debt.

That kind of debt relief would have clear benefits, according to a new report from the National Bureau of Economic Research (NBER).

Researchers looked at debt relief data from the credit bureau as well as from a lawsuit filings from 2017 related to National Collegiate — which held 800,000 private student loans totaling over $12 billion or about 11% of all outstanding student debt at the time — and concluded that there are “benefits of intervening in the student loan market to reduce the consequences of debt overhang problems by forgiving student debts.”

The report asserted that four things happened to borrowers in default who experienced debt relief: They saw their overall indebtedness reduced by 26%, were 12% less likely to default on other accounts, gained increased mobility when it came to job opportunities, and were more likely to increase consumption overall.

A 2016 graduate of Rutgers University in Piscataway, New Jersey, U.S., May 15, 2016. (Photo: REUTERS/Mike Theiler)

Since those examined in the report were already in default, they weren’t making student loan repayments. But even though their monthly expenses hadn’t changed, the experience of debt relief led them to manage other debt differently.

“The thing that was interesting about this study is that the people that got the forgiveness weren’t paying anyway, so it actually did not change their monthly loan payments at all,” Ben Miller, the senior director for post-secondary education at the Center for American Progress, told Yahoo Finance. So “it suggests there might be some sort of psychological benefit to this relief that goes beyond the household balance sheet.”

“That to me is really interesting,” Miller added, “because it suggests that there may be external benefits to debt relief that you don’t otherwise see.”

Student debt has soared in the 21st century. (Graphic: David Foster/Yahoo Finance)

Borrowers could see overall debt reduce by 26%

The first effect of student debt relief is that borrowers reduce their total liabilities by about $4,000 beyond the cancelled loan liabilities, according to the study. This means that with an average level of debt at $15,317, borrowers could see a 26% reduction.

“We find that consistently across all debt categories, and both with and without county-month fixed effects, the treated borrowers are significantly more likely to reduce the number of accounts,” the researchers wrote.

The study estimated that debt relief on average would reduce credit card debt specifically by $350, auto loans by $300, and mortgages by about $1,000.

“Overall, these findings suggest that treated individuals are significantly more likely to reduce their leverage after the debt is discharged,” said the report.