The opinion comes as Democratic presidential candidates Bernie Sanders and Elizabeth Warren dangle the prospect of forgiving some or all of the $1.5 trillion in outstanding education debt. Both candidates have also proposed free free college.
Moody's, however, think the effects of wholesale debt forgiveness at a macro level would be fairly muted.
"In the near term, we would expect student loan debt cancellation to yield a tax-cut-like stimulus to economic activity, contributing to a modest increase in household consumption and investment," said William Foster, the firm's senior credit analyst. "The magnitude of the stimulus would depend on the size of the debt relief and income level of the beneficiaries."
That said, CNBC notes that the issue of student debt 'and its role in growing wealth inequality' has been seized upon by Democratic candidates, and could eventually lead to a 'fundamental change to the way higher education is financed in the U.S.' due to the disproportionate impact on younger people.In dollar terms, Foster cited studies showing that canceling debt would add $86 billion to $108 billion a year to GDP over a 10-year period. Less aggressive measures to forgive some loans and restructure payments for others would amount to $120 billion over a decade.
In a $21.5 trillion U.S. economy, those kinds of gains won't move the needle very fair [sic] from a broad sense. - CNBC
"Over the longer term, debt forgiveness could lead to an improvement in small business and household formation, as well as increased homeownership," Foster continues in the note. "However, it could also increase the risk of moral hazard and the accumulation of even higher student debt burdens."
Last month a former official working for the agency administering the country's federal student loan program resigned, and has endorsed canceling most of the country's outstanding student debt.Future borrowers, for instance, might be encouraged to run up big loan balances on the assumption that their debts will be forgiven at some point.
It's also unclear how much forgiveness would address wealth inequality. The New York Fed estimates that about two-thirds of outstanding debt is currently held by the upper-half of earners. -CNBC
Calling the system "fundamentally broken," A. Wayne Johnson - appointed in 2017 by Education Secretary Betsy DeVos, says that repayment trends suggest most student loan debt will never be repaid, according to the Wall Street Journal.
His solution? Forgive up to $50,000 for anyone with federal student-loan debt, which would amount to a bailout of approximately $925 billion. The plan would wipe out the debt of nearly 37 million borrowers. He would also advocate for a tax credit for up to $50,000 for people who have already repaid their debt.
Interestingly, that's the exact amount Elizabeth Warren's plan would forgive; $50,000 for anyone with under $100,000 in annual household income (and less for those above that amount).
"It's a problem for all of us," said Warren in April, adding: "It's reducing home ownership rates. It's leading fewer people to start businesses. It's forcing students to drop out of school before getting a degree."
Here in Germany we don't have sudent debt. Universities are free. Same in several other countries, even outside of Europe. Even BRAZIL.
And guess what? no moral hazard, no apocalipse. Conservatives love to CONSERVE everything that is wrong with the current system fight the solutions with all their strength.
Don't complain when you become a debt slave in your next incarnation. You fought like hell to preserve that slavery in this life. You reap what you sow.