Stimulate the economy with student loan forgiveness?

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With economic stimulus money flowing around like a peace pipe at Woodstock, everyone has their ideas about how to stimulate the economy. One proposal gathering a following on Facebook is "Cancel Student Loan Debt to Stimulate the Economy.

The group currently boasts more than 160,000 members. Founder Robert Applebaum told BusinessWeek that after graduating from law school and earning a salary too low to make payments, his student debt load has grown to $100,000. "Despite having a law degree, I'm middle class and I don't have any money at all," he says. "I don't own a house or a car. My only assets are my couch and television," he said.

Forgiving student loans as part of a stimulus package has a certain appeal to it -- It's definitely a better idea than paying bonuses to the losers at AIG. And as Applebaum writes, it would certainly increase consumer spending:

"Forgiving student loan debt would have an IMMEDIATE stimulating effect on the economy. Responsible people who did nothing other than pursue a higher education would have hundreds, if not thousands of extra dollars per month to spend, fueling the economy NOW. Those extra dollars being pumped into the economy would have a multiplying effect, unlike many of the provisions of the new stimulus package. As a result, tax revenues would go up, the credit markets will unfreeze and jobs will be created."
In the long run though, it's a terrible idea (although my colleague Josh Smith disagrees). Student debt loads for graduates continue to increase at an alarming rate, a rate of increase that will, I believe, set the United States up for a complete disaster: a generation of educated people with no retirement savings or assets -- a nation of 50-somethings with nothing but a couch and a television. We need to be sending the message to young people that student loans are an evil to be avoided. Forgiving current loans creates a moral hazard and could have the unintended consequence of stimulating increased borrowing among today's students: Why not, if Uncle Sam's going to come and bail you out?

Still, I applaud Applebaum for his efforts. If nothing else, it will draw attention to the devastating consequences of excessive educational debt. Even if he's unsuccessful in his quest for a bailout, his work may encourage high school seniors to pursue affordable educational options.
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