Student-debtFV

Student Debt – Time for conversation about debt forgiveness

Let’s face it, the student loan program turned to be a miserable failure. It neither made college more affordable nor significantly more accessible. And now it’s burdening the Millennials with a mountain of more than a trillion dollars of debt which is growing at a rate of more than 100 billion dollars per year. This debt is not only making tens of millions of Americans’ lives miserable but also depriving the economy of this potential spending.

Though the student loan system was set up in 1965 under the Higher Education Act, it was only around the early 1990s that it started to take off. In the past three decades, more than $1.2 trillion of student loan money was created and injected into this market. The impact on the level of college tuition and fees was swift; between 1983 and 2013 college tuition multiplied by a factor of three in real terms. Contrary to conventional wisdom and politicians’ demagoguery, student loans do not make college more accessible to those who cannot afford it. More money for student loans also does not create significantly more spots in college; it just increases the cost of each available spot since there is more money chasing the same number of seats. What does make college more accessible is increasing colleges’ student capacity. Increasing capacity, however, requires planning, teachers, staff, buildings, infrastructure, disciplines and even a reputation that will attract qualified teachers and students. All of these factors can only grow in a limited way in existing institutions, whereas new institutions take decades to come into being. In the long run, increasing budgets can create more college seats, but this is a lengthy process that takes many decades.

In 1988, the University of California decided to create a new campus in Merced called UC Merced. It finally opened in 2005. Ten years after its inception, this campus is hardly successful. UC Merced has 15% of the enrollment of the average major UC campus, the majority of which were set up some 70 years ago, and it also has no impressive national ranking or prestige to attract top students and faculty. So all this student loan money creation we saw above had only one noticeable impact: it sharply increased tuition, and with it, lavish university spending. Ironically, all the loans taken out to make college education accessible to all had the inverse effect as prices have skyrocketed, making universities even more unaffordable than before.

Percentage of Real Growth in College Tuition and Fees 1983-2013 (Inflation Adjusted)

studentDebt
Source: The College Board, Annual Survey 2013-2014


It comes as no surprise that in the aggregate, more than 60% of college graduates in 2012 graduated with an average of $29,400 in debt 1. It is also unsurprising that total student loan debt has passed the $1.2 trillion mark as of early 2014, of which some 80% is held by the federal government 2. This debt is owed by some 37 million Americans. Among the under-30 set, more than 60% of college graduates have outstanding student loans.
Young people are not the only ones engulfed by this debt. About 1.7 million retiree households are still paying student loans. Their total debt has grown six-fold, from $2.8 billion to $18.2 billion in the past decade. Of these retirees’ households, 32% are defaulting on their student loans, 3
and social security payments are garnished to pay for these loans.

The country’s total college debt is higher than the annual economic output of countries such as Mexico and South Korea, and it has been growing at a rate of over $100 billion a year since 2007. This influx of money has affected universities, which have started building lavish buildings, bettering employment conditions and increasing their administrative staff. In the past 30 years, the number of administrative staff more than doubled, significantly beyond the growth in the number of students. 4

2014 is behind us and soon we will learn about the new heights of Wall Street bonuses for the end of 2014. According to the Office of the New York State Controller, the 2013 bonuses stood at around $26 billion – will 2014 eclipse the $30 billion of 2007? There’s a good chance they will. Interesting question: in 2008, 11 out of 12 major US financial institutions were practically bankrupt, so where did they get all these billions to give out as bonuses? No need to speculate – here is the answer from the guy that gave them that money and ran QE 1:

“I can only say: I’m sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed’s first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.” 5

If that isn’t enough, the Fed’s discount rate charged by the banks today is around 0.75%. Student loans on the other hand are charged by the federal government at a rate between 4% and 7.5%. And the cost of tuition is hardly tax deductible even though it’s an investment for the creation of future income.

So here is how things make sense in America for 2015. Wall Street gets free money from the government through bailouts, three EQ programs and zero interest loans so it can pay employees and executives’ lavish salaries and some 30 billion dollars in year-end bonuses, while students are forced to become heavily indebted to the Federal Government at a rate that is 7 times higher than that paid by Wall Street. All of this is done in order to get an education that is essential for the future economic development of this country. The current policy seems to incentivize those who create debt (the banks) and penalize those who gain knowledge the key for creation of wealth.

In the past 6 years, the Fed has created more than 4 trillion dollars and pumped it into the economy via the different QE and stimulation programs. This money was funneled through the banks and financed government deficits. If this policy makes sense (a subject for a different discussion), why not hand a trillion or so of these created dollars directly to consumers, such as students in the shape of loan forgiveness? Furthermore this debt forgiveness is really not even money creation because this money has been created and spent long ago; it’s just putting the interest and principal annual payments, which are around 100 billion dollars a year, in the hands of consumers. The Fed-created money funneled through the banks does little, but push up asset prices, mainly within the stock market. This enriches holders of stocks, who are overwhelmingly the top 5%. Pushing a fraction of this money to students will stimulate the entire economy directly, and not only wall Street and its satellite industries, and help the neediest. This makes more sense economically and morally alike.

In a more perfect world the Fed wouldn’t have been engaged in massive money creation operations and the US economy wouldn’t have grown its debt by 50 times to 59 trillion dollars in the past 50 years, but if this is the course history led us to we should at least conduct this travesty in a relative sensible and morally justified way. To that end, QE devoted to student loans is not only more targeted, useful and justifiable but will eventually also be inevitable.

The writer is the author of the book “A Brief History of Money- How We Got Here and What’s Next” available also in eBook at Apple-iBook and Amazon-Kindle

1 The Project on Student Debt, Student debt for the class of 2012,
http://projectonstudentdebt.org/files/pub/classof2012.pdf

2 12 Consumer Financial Protection Bureau

3 14 United States Government Accountability Office, September 2014.
http://www.gao.gov/assets/670/665709.pdf

4 Lindsey Burke, How Escalating Education Spending Is Killing Crucial Reform, Oct 2012,
http://www.heritage.org/research/reports/2012/10/how-escalating-education-spending-is-killing-crucial-reform

5 http://www.wsj.com/articles/SB10001424052702303763804579183680751473884?autologin=y

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