'This could be huge'—economists weigh in on Biden’s proposal to forgive $10,000 in student debt in exchange for public service

Democratic Presidential candidate and former US Vice President Joe Biden speaks during the final presidential debate at Belmont University in Nashville, Tennessee, on October 22, 2020.

Since President Trump took office, the total amount of student loan debt held by Americans has increased more than 16%, from $1.44 trillion in 2017 to roughly $1.68 trillion today.

An estimated 46 million Americans have student loans, making it the second biggest form of household debt in the country.  

These totals worry many economists, who say that student debt disproportionately impacts women, contributes to the racial wealth gap, puts younger generations at a disadvantage and holds the economy back

To address such concerns, Democratic presidential nominee Joe Biden has proposed creating a program that offers $10,000 of undergraduate or graduate student debt relief for every year of national or community service, up to five years.

According to the proposal, "Individuals working in schools, government and other non-profit settings will be automatically enrolled in this forgiveness program; up to five years of prior national or community service will also qualify."

CNBC Make It spoke with economists, education experts and political scientists about how this policy could impact borrowers and the U.S. economy.

The benefits of public service

"I think putting this policy on the table is a positive step," says Sandy Baum, senior fellow at the Urban Institute and professor emerita of economics at Skidmore College. "One main benefit of this proposal would be that we would get more people to do public service work."

Tying loan forgiveness to some form of public service gives policymakers the opportunity to create a sustainable and cost-efficient program while also providing work opportunities that could be particularly valuable for recent graduates, she says.

"We're talking about something that is an exchange for services. And those services, if properly organized and defined, will bring a real benefit to society so we're not just, you know, throwing money into the ocean. We're actually getting something in exchange for it," says Baum. "In addition to the fact that we're giving people money to spend, and they will spend it in the economy."

How student loans became a $1.6 trillion problem
How student loans became a $1.6 trillion problem

The microeconomic impact

Biden's student loan forgiveness proposal would not have as large of an impact on the overall economy as a stimulus package might, says Elise Gould, senior economist for the Economic Policy Institute. But "from a microeconomic standpoint, to those individuals that are affected, this could be huge," she says.

"For one, it may open up the range of jobs that people can take because they don't just have to chase the highest paying jobs to pay off loans," she says. "So we might see better matches in terms of people using their college degree, or their training, or pursuing their passions — just more efficient matches between workers and jobs."

Gould adds that loan forgiveness might also allow more young workers to pursue traditional markers of adulthood, such as buying a home or starting a family, which many have been forced to delay because of student debt

An opportunity for common ground

How the policy would define and determine qualifying public service is very important, say all the experts that CNBC Make It spoke with — and it's key for this policy to get bi-partisan support.

"I think his loan forgiveness proposal, and prioritizing student loan debt, is really a no-brainer," says Judith Scott-Clayton, an associate professor of economics and education at Columbia University. "Especially in terms of the consequences of loan default and the trends that we're likely to see if nothing is done urgently on that issue, I think that has the potential to be very impactful."

But Scott-Clayton says she's concerned about the policy tying debt relief to a complex set of requirements. Such a proposal would be most successful if it made it easier for borrowers to receive relief. 

Avoid this mistake when consolidating your student loan debt
Avoid this mistake when consolidating your student loan debt

"There's an opportunity here," says Rick Hess, a political scientist and director of education policy studies at the American Enterprise Institute, arguing that Biden should consider expanding qualifying work experience to include for-profit organizations. "If the Biden team can find a compromise on student loan relief or student loan forgiveness, there's potentially common ground on the left and the right here."

The proposal is politically prudent, says Aaron Smith, co-founder of Savi, a public benefit corporation focused on helping borrowers navigate student debt. He points out that student debt has a big impact on a wide swath of voters, including a growing number of voters over the age of 65. 

"This is one of the top economic issues impacting people," explains Smith. "Student loan debt is now bigger than credit card debt. It's a huge challenge facing the country, and it's something that really motivates people in terms of voting and in terms of getting the word out."

See also: Is an online master's degree worth it?

Don't miss: Chase Sapphire Preferred is offering a massive 80,000-point bonus for a limited time

Is an online master's degree worth the money?
Is an online master's degree worth the money?