Whenever there are economic slowdowns, politicians like to talk about stimulating the economy. Often, it’s in the form of a tax break. Sometimes they opt to invest money to upgrade old bridges and roads. Their goal is to get money moving again and ensure that people keep spending.
But what if the best way to stimulate the economy is one that’s rarely talked about?
Student Loan Debt Is a Big Drag On The Economy
Students are graduating with record levels of student loan debt. In 2016, that worked out to an average of $30,000 per borrower, according to education expert Mark Kantrowitz. That debt is having a huge impact on the economy. Millennials aren’t able to reach important life milestones like moving out on their own, buying a car, getting married, having children, or going back to graduate school. Given their monthly student loan payments and the specter of debt hanging over them – they just don’t have the money to do any of these things.
But the fact that millennials are not getting married or having kids means that the economy has lost out too. Moving out on your own leads your to spend at local stores in order to set up your household and buy things like dishes or furniture. Weddings involve a lot of spending as well and are great boosts for local economic activity, and having children is notoriously expensive.
When millennials delay or forego any of these life events, this doesn’t just affect the local children’s furniture store or the florist who won’t be providing wedding flowers. It means that that florist might not need to hire an assistant or to purchase an extra delivery truck. That would then have an impact on the assistant who might now be jobless and the people who manufacture delivery trucks.
By forgiving some student loans or reducing student loan interest rates to help students pay off their loans faster, politicians could help millennials free up cash which they can use to reach these life milestones or just to buy things that they desperately need but have had to put off buying.
Why Tax Cuts Are Bad At Stimulating The Economy
How does forgiving student loans and reducing interest rates stack up against the usual method of giving tax cuts to businesses and the wealthy? It turns out that tax cuts are ineffective as a stimulus.
The non-partisan Congressional Budget Office found that tax cuts for the wealthy were one of the worst ways to stimulate the economy since the rich were far more likely to save the money than spend it.
Similarly, during the recession, many companies built up huge moats of cash to ride out the recession – a whopping $2.8 trillion worth!
Part of the problem was that there was tepid consumer demand which made companies wary of investing their money in innovations or increased production. So, they just sat on that money instead of circulating it through the economy and helping with the financial recovery.
Why Infrastructure Upgrades Are Ineffective Too
Upgrading infrastructure is a great long-term investment but it doesn’t work well as a way to stimulate the economy. That’s because it just takes too long to get all the plans and permits in place. In fact, it can sometimes be years before a project actually breaks ground since public projects have to follow strict regulations, consultations, and bidding processes.
The best stimulus is one that can be put into effect quickly and then have immediate impact – something that infrastructure investments usually can’t do.
Why Giving Stimulus Money to Those Struggling Is More Effective
If wealthy people and companies hoard cash during economic downturns and infrastructure spending takes too long, where should stimulus cash go? Think about it this way, if you're struggling and finally get a little bit of financial relief what do you do?
Most people will need to replace things like work pants that are starting to become ratty or shoes that no longer fit their kids. People who are facing financial stress, like student loan borrowers, are more likely to spend a higher percentage of the money you free up for them than someone with millions of dollars in the bank. This consumer spending could then help boost consumer confidence and provide the incentive companies need to start spending again as well.
Okay, But How Do You Do It?
With over $1.3 trillion dollars in student loans currently outstanding, the question you might be asking is how do you implement such a program? Obviously, you can't forgive all of the federal student loans that are currently in circulation. So, what is the best way to provide relief to as many people as possible?
One method is to forgive a portion of certain types of loans. For example, since there are fewer Perkins loans you could potentially forgive a portion of Perkins loans. This could help those in the most need of assistance since Perkins Loan holders come from low-income families. This could free up hundreds or even thousands of dollars per month that would have gone to student loans which could have a huge impact on the economy.
The other option would be to reduce interest rates across the board through refinancing and consolidation. This is already something that is being proposed by Hillary Clinton as an attempt to help borrowers and eliminate the profits that the government currently makes on student loans. This would free up money that would have been going towards monthly payments.
Whatever method politicians choose, focusing future stimulus cash on student loan debt could have significant positive effects on the national economy.
It would also allow the nation’s young people to sleep a little better at night.