Economics - General

Loan Forgiveness

The N.Y. Times recently reported that the recession has threatened many loan forgiveness programs.  Loan forgiveness programs are common for nurses and teachers.  This made me think, why would a firm offer loan forgiveness instead of higher wages?

  1. Cost of capital. Businesses may take advantage of lower borrowing costs.  “After-loan” wages would be higher for workers if businesses offered loan forgiveness for a given labor cost to the firm.
  2. Self-control.  Workers may prefer lower wages with loan forgiveness to higher wages without loan forgiveness.  The loan forgiveness is in essence forced savings; compelling workers to take a lower wage in order to pay off their loan.
  3. Employee selection.  Loan forgiveness is often used to attract workers to rural and/or low-income areas.  Loan forgiveness is most attractive to workers who are most liquidity constrained.  By attracting liquidity constrained workers initially, these workers will also be the least likely to move–since moving also involves large fixed costs.  It could also be the case that employers are searching for workers who are more motivated by the work they do then the wage they make; these workers would be willing to start a career in a low wage sector in exchange for debt forgiveness.  Thus, short term costs may accrue to the firm, but they may be able to reap long-term savings.

Any other reasons you can think of?


  1. Perhaps – and I haven’t fully thought this through – to provide a signal to potential employees that the firm cares about education, and to signal they will pay for education in the future (whether or not they plan to do so in the future).

  2. I used to teach in Alaska and if I recall correctly, the loan forgivness was through the state or the Feds, not the school district that paid the wages.

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