Will Student Loan Forgiveness Boost or Hurt the Economy?

Student loan forgiveness is one of the most debated economic policies in recent years. For some, it’s a chance to unburden a generation and inject new life into the economy. For others, it’s a costly move that could fuel inflation and shift responsibility unfairly. A study by the National Bureau of Economic Research (NBER) shows just how complex this issue is—highlighting that while forgiveness can offer meaningful relief, its broader economic effects depend heavily on how the policy is structured.

So what’s the real impact? Does student loan forgiveness actually help the economy—or just move the costs around?

This article breaks down the potential pros and cons of loan forgiveness, explores the trade-offs, and shows how it might affect borrowers, taxpayers, and the broader economic landscape.

Key Takeaways

Loan forgiveness could increase short-term consumer spending.
It may ease financial stress and improve mobility for younger workers.
Critics argue it could increase inflation or be regressive.
The long-term effect depends on how the policy is structured and funded.

How Student Loan Forgiveness Works

Student loan forgiveness programs cancel a portion (or all) of borrowers’ federal student loan debt. The most common proposals include:

Flat forgiveness (e.g., $10,000 per borrower)
Income-based relief (targeting lower earners)
Public service forgiveness (for nonprofit, teaching, or government workers)

In theory, reducing debt should free up monthly income—money that could be redirected toward spending, saving, or investing.

Potential Economic Benefits

Increased Consumer Spending

Paying off loans frees up disposable income. More money in people’s pockets can:

Boost retail sales and local economies
Increase homeownership rates among younger adults
Reduce reliance on credit cards or personal loans

Improved Financial Wellness

Less debt can mean:

Better credit scores
Lower stress and mental health costs
More flexibility in career choices

Economic Mobility

Forgiveness may allow people to:

Move to higher-cost cities for better jobs
Start families or businesses earlier
Contribute more consistently to retirement accounts

Potential Economic Drawbacks

Inflation Risk

If forgiveness injects too much spending into an already hot economy, it could add upward pressure to prices. This is especially concerning during periods of high inflation.

Cost to Taxpayers

Loan forgiveness doesn’t eliminate the debt—it transfers the burden. Depending on the size and structure, it could:

Increase the federal deficit
Require spending cuts elsewhere
Raise taxes over time

Regressive Benefits

Some argue that broad-based forgiveness helps higher earners more, since college graduates generally earn more over their lifetimes. Without income targeting, benefits may flow to those who need them least. According to the Brookings Institution, untargeted student loan forgiveness tends to be regressive, with a significant portion of the relief going to higher-income borrowers—many of whom hold advanced degrees and already have strong earning potential.

What the Research Says

At the macroeconomic level, most studies suggest that student loan forgiveness could offer a modest short-term boost to GDP by increasing consumer spending, particularly among younger borrowers. However, the net impact depends on how the policy is financed—whether through higher deficits, spending cuts, or tax changes. Over time, any positive momentum could be tempered by inflationary pressures or debt sustainability concerns.

A 2019 analysis from the Brookings Institution found that under a universal forgiveness proposal, households in the top 40% of the income distribution would receive about 66% of the benefits, while the bottom 20% would receive just 4%. This indicates that broad-based forgiveness may disproportionately benefit higher earners.
Other studies show that targeted student loan relief—based on income or repayment history—can lead to more equitable and cost-effective outcomes. For example, a 2024 study published in the Journal of Financial Economics found that forgiveness programs aimed at lower-income borrowers or those in default yield greater economic efficiency and progressivity compared to blanket forgiveness.

Alternative Solutions to Consider

Beyond broad forgiveness, there are several ways to improve the student loan system. These include capping interest rates to limit balance growth, expanding income-driven repayment options to ease monthly costs, and allowing refinancing for federal loans. Also suggest tying college funding to student outcomes like graduation and employment rates.

These ideas aim to make repayment more manageable and the system more sustainable—without requiring large upfront spending.

Student Loan Forgiveness — FAQs

How could student loan forgiveness influence consumer spending in the near term?

Loan forgiveness may increase available income for some borrowers, which could be redirected toward spending, saving, or debt repayment, though the overall effect depends on broader economic conditions.

What effect might student loan forgiveness have on housing trends among younger adults?

Reduced debt obligations could give some borrowers more financial flexibility to consider homeownership, though housing affordability and credit standards remain key factors.

How does debt forgiveness relate to credit profiles?

Lower balances may improve certain borrowers’ debt-to-income ratios and credit scores, which could affect access to other types of credit.

Could broad loan forgiveness affect inflation?

Some observers note that higher consumer spending from loan forgiveness could add price pressure during inflationary periods, though the impact would vary with overall economic conditions.

How does student loan forgiveness affect the federal budget?

Forgiveness does not erase debt; it shifts the obligation. Depending on program size and structure, this may increase federal spending or require offsetting measures.

Why is broad loan forgiveness sometimes described as regressive?

Research suggests that higher-income households may capture a larger share of universal loan relief, since borrowers with advanced degrees often have higher lifetime earnings.

How might targeted forgiveness differ from universal programs?

Relief focused on income or repayment history could direct benefits more toward lower-income borrowers, which some studies suggest may improve equity and cost-effectiveness.

What are potential labor market effects of loan forgiveness?

Borrowers with reduced debt may have greater flexibility to relocate for jobs, pursue career changes, or start businesses, though individual outcomes will vary.

What role does public service loan forgiveness play?

Certain programs forgive federal student loans for eligible nonprofit, teaching, or government workers after service requirements are met, linking relief to workforce priorities.

How can student loan forgiveness affect retirement savings?

By lowering required debt payments, some borrowers may have more capacity to contribute to retirement accounts, though this depends on individual circumstances and financial priorities.