Erasing student debt creates a 'moral hazard' with a small economic stimulus: Moody's Investors Service

Erasing student debt creates a 'moral hazard' with a small economic stimulus: Moody's Investors Service
© Moodys

Moody’s Investors Service believes that while the mass forgiveness of student loans would provide a moderate boost to the economy, doing so could also create a “moral hazard” and other long-term risks, CNBC reports.

“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,” William Foster, Moody's senior credit analyst, and others said in a report.

“The magnitude of the stimulus would depend on the size of the debt relief and income level of the beneficiaries.”

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Democratic presidential candidates Sens. Elizabeth WarrenElizabeth Ann WarrenNew poll catapults Buttigieg to frontrunner position in Iowa Bloomberg, Patrick take different approaches after late entries into primary race Deval Patrick: a short runway, but potential to get airborne MORE (D-Mass.) and Bernie SandersBernie SandersSinger Neil Young says that America's presidents haven't done enough address climate change New poll catapults Buttigieg to frontrunner position in Iowa Growing 2020 field underscores Democratic divide MORE (I-Vt.) both have comprehensive higher education plans.

Both Sanders and Warren have proposed plans to alleviate student loan debt. Sanders has proposed canceling all federal loans to students, while Warren wants to eliminate all student debt up to $50,000 per student. The Vermont senator also wants to make all public universities free.

American student debt has ballooned in the past 20 years, going from $363 billion in 2005 to nearly $1.5 trillion now.

According to Foster's report, the elimination of student debt would add anywhere from $86 billion to $108 billion a year to the U.S.'s gross domestic product over a 10-year period, the news network reports.

While those figures seem very substantial, Foster argues that in the $21.5 trillion U.S. economy, those numbers would only have marginal effects over a longer period of time.

"Over the longer term, debt forgiveness could lead to an improvement in small business and household formation, as well as increased homeownership,” Foster continued in his report.

“However, it could also increase the risk of moral hazard and the accumulation of even higher student debt burdens.”