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Why Biden's plan to cancel student debt won't be easy to implement

Yahoo Finance's Rick Newman breaks down Biden's plan to cancel student debt.

Video Transcript

- As the Biden team finally starts to make good on that transition here, we're learning more about plans that they have. One of the big ones that President-elect Biden announced back in April were plans to cancel at least $10,000 in student debt, definitely a nod to some of the more progressive members of the Democratic Party that have been talking about it for quite some time. But more economists are warning that it might not be as impactful as some people hope, and for more on why that may be true, I want to bring on Yahoo Finance's Rick Newman for more on it.

And Rick, I mean, this is something we've talked about. The multiplier effect, I guess, is one thing you can point to if you really want to get into the economics of an idea of canceling student debt, but talk to me about what the expectations are around something like this.

RICK NEWMAN: Well you pointed out correctly that this is kind of a newer Biden policy. He was not talking about this in 2019 when he first announced his candidacy, but only kind of came around to this in April of this year. And of course, this is something Bernie Sanders and Elizabeth Warren have wanted to do. So in a way it's Biden's nod to the progressive wing of the Democratic party. OK, I'll consider this idea.

So he has said he would look into canceling somewhere between $10,000 and $50,000 worth of debt per student, and then you get into some pretty thorny questions. Should there be some kind of income threshold so you only get your debt canceled if you earn below a certain amount of money per year? How do you make sure this is not a benefit going to wealthier people who don't need it and so forth? It gets very thorny.

So Biden said he's going to do it and let's take him at his word and assume he is going to give this a shot, but I don't think it's going to be simple. And there are some real questions about fairness I think it's going to raise assuming he does try to do this.

- What's the economic case for it, Rick? It feels like on paper this sounds great, but we've had a number of guests who've come on and say complete cancellation is really not the way to go.

RICK NEWMAN: You know, so there is a case for doing this. I mean, there is a lot of data showing that student debt is a real problem that holds back young people, especially people who may have borrowed to go to college but then never finished. So you've got the debt without the degree. And you know, there are just some people who just cannot get out from underneath this debt overhang. So in that regard, it makes sense to find a way out of this trap for those people.

But then at a macroeconomic level, a lot of economists, including some Democrats, such as Jason Furman, who was President Obama's top economist at the White House, say the payback from canceling student debts is just very, very small. That's the multiplier Zach was referring to. So economists measure if you invest x amount, you know, let's call it $100 in certain programs, the biggest payoff honestly comes from just giving people money, or giving aid to states and cities so they can keep firefighters and cops and teachers on the payrolls.

You get a much lower bang for the buck by canceling student debt, and part of the reason is if somebody is paying $300 a month, let's say, and you cancel $10,000 worth of debt, you're not giving them $10,000. What you're doing is you're saving them $300 per month for many years into the future. So it's just not as effective as, you know, just putting that money directly into the economy.

- Yeah, it's a very good point, and it's something that the Committee for a Responsible Federal Budget looked into, in terms of that multiplier effect just stacking up relative as you said there, state and local aid comes in at about 0.88 times what's given there in terms of the student debt cancellation. A high estimate ranges from 0.23 down to 0.08 in terms of where this multiplier effect comes in. Even the Paycheck Protection Program, which isn't necessarily direct, right, that's really, that's aid given to small businesses, even that's higher than what we're seeing play out here for exactly what you're talking about, because you don't see it as a check to go out and spend. You just see it as a burden lifted off your shoulders.

But I mean, I don't think that's to be overlooked right Rick, when we talk about millennials in this generation that had been weighed down by that, delaying some pretty big decisions here, whether it's buying a house or even starting a family. I mean, there's something to be said, I think, about that aspect. That maybe--

RICK NEWMAN: I mean, there's a policy conundrum here, because if you're the person with the debt, of course you're going to feel financially way better off if somebody comes along and says, hey, you used to owe $10,000, I'm just taking that off your shoulders. I mean, that is financially freeing to you.

But let me give you some of the idea of the blow back I've gotten from people since I wrote about this yesterday. First of all, some people say, you know what, I considered going to college, but I didn't think it would be worth the money, and instead I got some technical training, and no one's going to give me any money for doing that. You know? What about somebody who just paid off their student loans, and you know, they're not-- they're outside the window for some kind of debt forgiveness.

There are a lot of people who worked their way through college, and you know, barely spent money on anything so they could get that degree, and they see people, you know, partying in school and not taking it that seriously. And they're saying, why should that person get this windfall, but I'm going to get a smaller windfall or nothing at all. So this is, I mean, we're going to hear a lot of this if Biden actually goes through with the program. And these people will have a point, honestly.

- Yeah, and we've heard from a few guests here talking about the moral hazard of the idea that the government's always just going to bail out debt. We saw that question raised back during the housing crisis now being raised yet again. But Rick Newman, appreciate you coming on to chat.

RICK NEWMAN: Bye guys.