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Harvard Business School prof: What it can mean for Morehouse grads to have loans paid off by Robert Smith

Robert F. Smith gives the commencement address during the Morehouse College 135th Commencement at Morehouse College on May 19, 2019 in Atlanta, Georgia.
Marcus Ingram | Getty Images Entertainment | Getty Images

Almost 400 members of Morehouse College's class of 2019 got an unexpected graduation gift this weekend: Their student loan bills will be paid off, thanks to their commencement speaker, billionaire tech investor Robert F. Smith.

"On behalf of the eight generations of my family that have been in this country, we're gonna put a little fuel in your bus," Smith told graduates, according to the Associated Press. "This is my class, 2019. And my family is making a grant to eliminate their student loans."

That's a financial game-changer for many of the graduates. "I don't have to live off of peanut butter and jelly sandwiches," 22-year-old grad Aaron Mitchom told the AP. "I was shocked. My heart dropped. We all cried. In the moment it was like a burden had been taken off."

A recent working paper from the National Bureau of Economic Research co-written by Marco Di Maggio, a professor at Harvard Business School, finds that the financial implications of debt forgiveness are significant. The study, which tracked 10,000 people who had their private student loans discharged, found that the borrowers increased their salaries by $4,000 over three years and carried less debt overall after they no longer had to make student loan payments.

They were also more likely to move, switch jobs or go back to school than similar borrowers whose debt was not forgiven.

Now those students will have the opportunity to take more risk in their careers rather than settling for the safety of less appealing jobs that can guarantee them the ability to repay their loans.
Marco Di Maggio
professor at Harvard Business School

The debt relief benefits outlined in the paper — including lower delinquency on other credit accounts, higher mobility, higher likelihood of changing jobs and increased income — will make a real difference to Morehouse grads, Di Maggio tells CNBC Make It.

Smith's gift to Morehouse grads comes as college tuition prices skyrocket and grads accumulate more and more debt. Proposals for student loan debt cancellation by politicians like presidential candidate Elizabeth Warren are gaining momentum, and other institutions of higher learning are moving to make tuition free or significantly cheaper to reduce the burden on students.

That U.S. borrowers owe a collective $1.5 trillion in student debt means they must often delay major financial and professional decisions, such as buying a house, saving for retirement and paying off other types of debt.

The situation will be different for these new alums, thanks to Smith's pledge: "Now those students will have the opportunity to take more risk in their careers rather than settling for the safety of less appealing jobs that can guarantee them the ability to repay their loans," says Di Maggio. "They are also going to be more likely to make important life decisions, [like] getting married or having children, early on."

Smith told the graduates he hopes that they will show others a version of the same generosity they've enjoyed.

"Let's make sure every class has the same opportunity going forward because we are enough to take care of our own community," Smith said. "We are enough to ensure we have all the opportunities of the American dream."

Don't miss: Elizabeth Warren's $1.25 trillion education plan aims to end the cycle of student debt—here's how

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