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A Billionaire Paid Off the College Debt of an Entire Graduating Class; What Happened Next Won't Surprise You

By:
Chris Gaetano
Published Date:
Jul 24, 2020
Last year, a billionaire paid off the student debt of Morehouse College's entire graduating class, which set up a natural experiment to see how they fared compared to the 2018 class, which was essentially the control group. One year later, the results have become apparent: Graduating debt-free leads to much better financial outcomes.

Bloomberg profiled one student from the class of 2019, who received billionaire Robert F. Smith's gift, and one student from the class of 2018, who did not. While the college is planning to study the differences between the two groups as a way to gauge the effect of student debt on later financial health, Bloomberg said it is already obvious that the 2019 students have had a much easier time post-graduation.

The 2019 student left school with a great credit score and none of the financial burdens a typical graduate faces. Working as a vocal coach, he is planning to start his own small business and buy a house. The 2018 student, conversely, had planned to go to become a doctor but could not afford the extra schooling and so instead enrolled in a community college to eventually get a master's degree in public health, all while sinking even deeper into debt.

There is currently $1.6 trillion of outstanding student debt, and nearly half of college students surveyed last year believed said they will likely die before they've managed to pay off their loans. The amount is so large that the Federal Reserve warned two years ago that it could slow down other parts of the economy. This warning comes on the backs of other Fed studies that show the effects of rising student debt. A 2016 research paper released by the Federal Reserve found that every 10 percent increase in student loan debt reduces home ownership by 0.1 percentage points among 25- and 26-year olds who had attended college. A 2015 research paper by the Federal Reserve found that increases of one standard deviation in student debt reduced the number of businesses with one to four employees by 14 percent on average between 2000 and 2010.

These sorts of studies, on top of the general hardships of student borrowers mired in debt, have led some to call for an en masse cancellation of student debt as a way to boost the economy. A paper from the Levy Economic Institute at Bard College argued that a one-time policy of student debt cancellation would have a meaningful stimulus effect with only moderate effects on the federal budget, interest rates and inflation.

With unemployment on the rise and businesses everywhere shutting down, should such a stimulus happen today, the total costs would still be lower than what has already been spent on pandemic relief measures such as the CARES Act, and further would likely be easier to administer, as the government not doing something generally does not require the same level of bureaucratic infrastructure of other programs. A cancellation of this nature, it could be argued, would serve to free up money for millions of Americans, who, now liberated from constant debt payments, would likely spend their extra cash on items like food, medicine, rent and consumer goods. Such spending, in turn, would translate into increased business profits, which could then be turned into more jobs at a time when the country is in dire need of them.