Canceling Student Loan Debt Is Poor Economic Stimulus

Facing a weak economy still suffering from the effects of the COVID-19 pandemic, there have been a number of calls for President-elect Joe Biden to support the economic recovery by cancelling some or all student loan debt.

There is a debate over whether the President has the legal authority to cancel debt by executive order and whether or not it would be good policy overall.  However, one thing is clear: student debt cancellation would be an ineffective form of stimulus, providing a small boost to the near-term economy relative to the cost. Assuming the loans would be forgiven tax-free, we estimate an economic multiplier of 0.08x to 0.23x.

In this analysis, we show:

There are a number of benefits and costs associated with cancelling student debt. But as a stimulus measure, its “bang for buck” is far lower than many alternatives under consideration or the COVID relief already enacted.