Research

This paper studies the redistributional effect of student loan forgiveness by developing a general equilibrium overlapping generations model with both college education and housing choices. After making a college decision in their early 20s, agents face a discrete housing choice each period as well as the standard consumption-saving decision. Using this framework, I examine the response to a one-time student loan forgiveness. I find that general equilibrium plays an important role in amplifying the regressive aspect of the program. As the government finances the policy by raising tax rates, all individuals but the beneficiaries inevitably face welfare loss. Homeowners are partly compensated by the housing market forces. The program increases housing demand by its recipients as they are more likely to buy houses earlier than they would have otherwise. The net result is an increase in housing prices, which partially mitigates the welfare costs of the program for existing homeowners. The worst impacted group is the poor high school graduates, who are particularly hurt more by general equilibrium effects through both capital and labor markets. In short, the program increases skilled labor and, thereby, effective labor force, which then decreases the market wages and increases the interest rates. Consequently, the poor earn less but do not benefit from the higher interest rates.