Larry Kudlow, President Donald Trump’s top economic aide, said on Friday that he’s working on a plan to cut taxes for the American middle class that would be announced ahead of the 2020 election.
In the eyes of Moody’s Investors Service, several Democratic presidential candidates already have a similar proposal.
In a sweeping report on the potential impact of student-loan forgiveness on the U.S. economy and the government’s finances, analysts led by William Foster made this striking statement: “In the near term, we would expect student loan debt cancellation to yield a tax-cut-like stimulus to economic activity.” The idea is that because more than 90% of the debt has been issued or guaranteed by the federal government, lowering or erasing those interest payments is tantamount to slashing taxes owed to ultimately the same source.
Even for a subject like student loans that has been poked and prodded from every direction, this framing is novel. But it makes sense that Moody’s, which assesses the creditworthiness of sovereign governments like the U.S., would draw such a parallel between tax cuts and student loan relief as forms of fiscal stimulus. As the analysts noted, universally canceling student debt would barely impact America’s national debt because Treasuries have already been issued to finance the loans. Rather, one issue is that the government would lose the revenue from loan repayments, which amounted to about 0.4% of gross domestic product in 2018.
Admittedly, it’s somewhat laughable to call that a concern, given that the nearly $1 trillion U.S. budget deficit is already practically unprecedented for a period outside of recession or wartime. The Trump administration’s 2017 tax cut relied on the assumption that accelerated economic growth would cover lost revenue, yet real GDP growth in the third quarter was 1.9%, Commerce Department data showed last week, the second-slowest annualized pace since Trump was elected. Candidates like Senator Elizabeth Warren of Massachusetts, by contrast, have mostly specified how they plan make up the revenue lost from forgiving student loans (in her case, a wealth tax).
A more pressing question about canceling student loans revolves around whether doing so targets the segment of the population that needs the fiscal boost the most. My fellow Bloomberg Opinion columnists have weighed in on this, with Michael R. Strain arguing Warren’s plan helps the well-off, while Noah Smith thinks her income-based repayment plan is a good start and necessary to alleviate the $1.5 trillion debt’s drag on economic growth.
Other candidates have proposed a more targeted approach. Mayor Pete Buttigieg of South Bend, Indiana, for instance, has said he would eliminate the debts of students who attended “low-quality, overwhelmingly for-profit programs” that failed the federal gainful employment rules, which were meant to root out higher-education programs that leave graduates with excessive debt relative to their job prospects.
Moody’s analysts seem to fall somewhere in between. Here’s the upside of forgiving student loans:
“Increased student debt can explain about 20% of the reduction in homeownership rates among young adults between 2005 and 2014, likely a reflection of a student loan borrower's reduced ability to save for a down payment on a home or qualify for a mortgage. Limited savings can also delay the pace of household formation, as the costs of starting a family can be prohibitive without sufficient savings. Meanwhile, high delinquency among student loan borrowers also impairs credit scores, which can further weigh on an individual's ability to access the credit necessary to start a business or purchase a home.”
That likely resonates with a lot of young adults. But Moody’s analysts give a nod to Strain’s view on who would get most of the benefits: