Why That Astonishing Gift to Morehouse Students Really Is a Useful Economics Experiment

Robert Smith and others in academic robes onstage at Morehouse commencement.
A video still of billionaire private equity mogul Robert Smith, captured after he promised to pay off the student debt of the 2019 graduating class of Morehouse. Reuters

When private equity billionaire Robert Smith announced this weekend that he would pay off the student loans belonging to the entire 2019 class of Morehouse College, at least two groups of people were especially excited. First, obviously, were the students and their families, for many of whom the gift is probably worth tens of thousands of dollars. (The median debt among Morehouse grads who borrow for school is $26,000, according to the Department of Education.) Second were the economics nerds, represented on Twitter by none other than Rep. Alexandria Ocasio-Cortez.

Natural experiments are pretty much what they sound like. In the hard sciences, researchers can usually test their hypotheses with traditional experiments. If you’re running trials on a new cholesterol drug, you randomly assign a test group and a control group. You give the latter a placebo, the former the new medicine drug, and see if health improves. Then you draw conclusions from the results.

Economists don’t often get to test their ideas in a lab, which can make it hard to distinguish correlation from causation—though Lord knows they try anyway with all sorts of fancy math and empirical strategies. But sometimes the real world provides events that can take the place of experiments. Some of the most famous research on how immigration affects wages, for instance, looked at what happened when a massive influx of Cuban migrants arrived in Miami in 1980 via the Mariel Boatlift. There was a great paper a while back that looked at the effects of prostitution on public health and policing after Rhode Island accidentally legalized sex work in 2003. The key is that these events are basically random, so it helps get around the correlation vs. causation problem. Cubans didn’t go to Miami because it had a great economy; it just happened to be close. Rhode Island’s dalliance with legal prostitution wasn’t a reflection of its enlightened ideas on STI prevention or policing.

You don’t get much more random than a billionaire arbitrarily deciding to pull an Oprah for a single class of college graduates. As a result, Smith’s largesse could help us learn about the effects of mass student debt forgiveness, a topic that’s gotten a boost of attention thanks to Elizabeth Warren’s plan to wipe out education debt. One strategy might be to study how this year’s batch of Morehouse alums fare in life compared with last year’s and next year’s, who could serve as control groups.

Coincidentally (at least, I assume it’s a coincidence), a group of economists released a draft study earlier this month that used another natural experiment to test the effects of student debt forgiveness. It looked at borrowers whose loans were canceled between 2010 and 2017 by a judge when it turned out the company that claimed to own their debts, National Collegiate, couldn’t prove it did. (The company had bought the debt from banks and other lenders, and the paperwork seemed to have been lost in the shuffle, which actually happens all the time with consumer debt.) The researchers compared those lucky beneficiaries of National Collegiate’s foul-up with similar borrowers who did not have their debts forgiven. Having debt forgiven seemed to make a large impact on people’s lives: They became more likely to move, and their incomes rose, on average, by $4,000. It seemed that removing the burden freed people up to pursue better opportunities for themselves. (Some recent research on credit card debt forgiveness has turned up similar results.)

Unfortunately, the results of the National Collegiate study might not tell us much about typical student loan borrowers. That’s because all the subjects who had their debt forgiven were previously in default, meaning they had run into financial trouble before the courts gave them a fresh start. It’s not clear that canceling the debts of somebody who was able to pay them back would have the same impact.

Looking at what happens to this year’s Morehouse students might give us a better sense of how forgiveness affects all sorts of borrowers, whether they’ve run into trouble with their loans or not. The only problem is that we may have to wait a while to see how these graduates’ lives turn out. As economist Justin Wolfers jokes, we can all look forward to getting some scientifically rigorous answers about loan relief about a decade from now. The paper’s title, of course, writes itself: