Illustration by Thuan Pham
As memory serves, Wichita State University’s Campus Activity Center, now the Rhatigan Student Center, housed an interesting oasis from the hectic college pace, where one could consume a beverage, chat with friends, read a book, or, as the name may have implied to those inclined, skip class? The Alibi provided all of that, and its name may be better defined by the actions of today’s students who are missing in action, not actually in class, nor faithfully logging into their virtual classes. What’s their excuse?
At most institutions of higher learning, admissions have dropped, a pre-pandemic trend that hasn’t been helped by Covid-19’s clearing of college campuses. Vocational/junior college options are growing in popularity, partly due to the ever-expanding cost of traditional colleges and universities. What was affordable in the 1970s has become almost out of reach in the 2000s. Student loan debt has easily surpassed credit card debt for many Americans as the #2 biggest item consumers will have to borrow money for during their lifetime, and houses are not far ahead of that trajectory for elite-diploma students, especially those in the medical field.
So what to do about that collective $1.6 trillion dollar debt load that students/parents are carrying? President Biden has stated that $10,000 forgiven per debt holder should become the federal government’s burden, nay, the taxpayer’s, en masse. Not attached to that idea? Here are some other proposals the administration is considering:
Limiting student loan payments to 5% of a person's discretionary income (income minus taxes and essential spending like housing and food) over $25,000;
Forgiving student loan debt for people who made payments for 20 years;
Granting $10,000 of undergraduate or graduate student loan relief for every year of national or community service, up to five years; and
Allowing the discharge of private student loans in bankruptcy.
When the Economics axis meets the Political one, we turn to independent voices, those who have crunched the numbers and also have attempted to influence their elected representatives. We need help to sort through that which we do not always have the time, nor the depth of knowledge to decipher. Not one, but two Bobs have volunteered to step into the ring and battle this complex topic to the best of their finely honed minds. Indeed, may the best ideas win!
Across-The-Board Student Debt Cancellation is a Bad Idea: Targeted Payment Relief is Far More Appropriate
By Robert Litan
Averages, by definition, conceal wide variations. One of the best illustrations is the famous statement by former Labor Secretary, Robert Reich, who is about 5 foot tall: “You know, Shaquille O'Neal and I have an average height of 6 feet.”
So it is with the quoted “average” student loan debt of $36,000, which may be a tad high. According to Forbes the average is about $32,700. Whatever the precise figure, student loan debt is distributed unevenly. As Kadija Yilla and David Wessel of the Brooking Institution have documented, only 6% owe 1/3 of the $1.6 trillion in total debt, while 18% of borrowers owe less than $5,000. Furthermore, individuals who owe the most tend to have borrowed monies for professional or graduate school that are pathways to higher-paying careers, while those who default most on their loans have lower incomes and have attended for-profit schools and community colleges.
In short, the student loan debt problem is very real for only a minority of borrowers, and any loan relief or forgiveness, as suggested below, should be limited to those most in need.
To be sure, the pandemic has made it more difficult for younger people who have attended college and financed it with debt, especially those who didn’t finish and have suffered greater job or income loss than college graduates, to stay current on their student loans.
President Biden proposed debt cancellation of $10,000 – assuming the Justice Department gives a thumbs up on the lawfulness of doing this by Executive action -- goes well beyond what is necessary to address this problem and has huge price tag: $373 billion as estimated by Utah professor Adam Looney, although well below the $1 trillion cost of cancelling all student debt up to $50,000.
To put the $373 billion cost in perspective, Looney notes that it is “larger than the amounts the nation has spent over the past 20 years on unemployment insurance, larger than the amount it has spent on the Earned Income Tax Credit, and larger than the amount it has spent on food stamps.” (emphasis added). Moreover, as Looney notes, the beneficiaries of a limited $10,000 across-the-board program on average “would be higher income, better educated, and whiter than beneficiaries of other transfer programs.”
More broadly, the notion that debt cancellation of any size would help close the overall black-white wealth gap, which is very real and which justifies other measures to help close it, is false. Duke University economist William A. Darity Jr. in a 2019 paper noted that “on the face of it,” a universal debt cancellation would appear to disproportionately benefit blacks because black students “hold a larger average amount of debt.” But he then went on to observe that college enrollment rates for whites exceed that for blacks, and once this offsetting factor is taken into account, “any difference in the mean [wealth] gap is imperceptible.”
If the objective is to minimize pandemic-related pain, then existing law already allows borrowers to defer their payments, without interest if the loan has a subsidized interest rate, for up to three years if they are experiencing hardship. If this deferral program is insufficient or not working for pandemic-related reasons, it could be modified, possibly by Executive action alone, to make clear that any job-loss or inability to obtain employment since the pandemic’s presence in the U.S. was clear (March 2020) counts as hardship.
Even a more generous $10,000 debt cancellation program can still be targeted, Looney suggests, on the basis of borrowers’ financial situation at the time they submitted at the time they sought the loan (which is on record at the Department of Education). Alternatively, the amount of cancellation up to the $10,000 maximum could be tied to a borrower’s current or recent average income, based on income reported to the IRS (provided borrowers assent to the Education Department accessing their tax filings).
As for larger amounts of loan forgiveness, the President noted in his town hall on February 16th that students who perform various kinds of public service – teaching, nursing, firefighting, serving in the military, and various kinds of non-profit work --can have their debt cancelled, which is already authorized under existing law. Under the Public Service Loan Forgiveness Act, signed into law by President Bush in 2007, the amount of debt cancelled depends on how long borrowers serve in one of these capacities. At a maximum, all federal student debt will be cancelled if a borrower serves 10 years in one of these jobs and has made timely payments for 10 years.
It would be appropriate, in my opinion, for Congress to relax the PSLF’s debt cancellation requirements somewhat, both as a matter of fairness, and as a way of enticing more people into necessary public service jobs.
In any event, debt cancellation is unnecessary for pandemic-related or other reasons for those borrowers whose loans are “income-contingent,” since their required payments already have been reduced by any pandemic-related loss of income, and any future payments are capped as a percentage of their income. Borrowers with fixed rate loans also under existing contracts can convert their loans to be income contingent.
At the end of the day, for those who believe, as I do, that the federal government should concentrate its limited resources over the longer run – after the short-term help to get us through the pandemic is no longer necessary – on those who are most needy, then are far more targeted and cost-effective ways of doing it than any across-the-board student cancellation.
For example, Utah Senator and former Republican presidential candidate Mitt Romney has proposed the Family Security Act, which would create a monthly cash benefit for families, with $350 per child up to age 5, and $250 for each child between ages 6 and 17. The Niskanen Center estimates that Romney’s legislation would cut child poverty by about 33%, immediately benefitting poor families and improving life prospects for their children. And it would be fully paid for through changes in the tax code (eliminating permanently the Child and Dependent Care Credit (CDCTC), head of household filing status, and the deduction for state and local taxes (SALT)) and repealing the current federal program (Temporary Aid for Needy Families (TANF)).
It has been reported that the Biden Administration is seriously considering this idea. Clearly, one of potentially many, ways for the Administration to work toward fiscally responsible, bipartisan measures that improve American life.
The Lessons of Student Debt
By Bob Love
The Problem
Beginning in the 1970’s, something began to erode the financial viability of the American middle class family supported by wages. First, mom went to work with dual-income families
becoming the rule by 1980. Then by 1990, families realized that even with two wage earners, they could no longer find cash after household expenses to pay their childrens’ post-secondary tuition … even at state schools and jucos. So they began to borrow to fill the gap and asked their children to borrow before they even had a job. …. And just as parents were asking their kids to go into personal debt, Washington was [without asking] saddling those same kids with national debt to meet its otherwise unpayable social welfare obligations to those kids’ parents and grandparents … as well as its discretionary handouts to [soon to become TBTF bailouts of] the Military Industrial Complex, BIG OIL, BIG AG and many others that caused federal expenses to vastly exceed “tax receipts” [more on those later]. As they say, “ _hi_ rolls downhill” … and the kids were at the bottom of “The Hill” … and as a group of individuals they will never be TBTF [no matter how vital they are collectively to the future].
So, the kids went into debt for their post-secondary educations … and student debt soared into the trillions … because the same federal government that was already saddling these kids with national debt decided to make it easy for the kids to get into personal debt by “subsidizing” student loans [while making it impossible to get out of debt by excluding student loans from discharge in bankruptcy]. And although these “subsidies” took on numerous financial forms [public and private], they all “stimulated” spending on higher education which was only too glad to “take the money”, expand overhead/expenses and eventually raise tuition to “meet the demand”.
Then a funny thing happened … the graduates discovered it was nearly impossible to get married, have two incomes with kids needing childcare and education, incur the regular expenses for a household and pay down [much less pay off] their own student loans … the EXACT SAME PROBLEM THEIR POOR PARENTS HAD FACED TWO DECADES EARLIER … JUST DELAYED. Who’da thought?
This unanticipated new problem took Washington quite by surprise, because [as noted above] Washington [since the time of Alexander Hamilton] has never considered debts as things that need to be repaid. So some of the brighter minds in Washington conceived a radical, new solution to the problem … a progressive epiphany … just FORGIVE THE STUDENT LOANS and make all education “free” so that nobody ever had to face this problem again. Sheer brillance !!!
But, of course, the debts will never be forgiven … just moved from the liability side of the students’ balance sheets to the liability side of Washington’s balance sheet [where they become theoretically “payable” by everyone as increases in the national debt] … but from there the loans are moved to the liability side of the Federal Reserve’s balance sheet where Washington hopes they can be “warehoused” [along with trillions in other national debt] until … someday somehow “as a practical matter” … they “die of old age” in a snowballing financial ponzi scheme that makes Bernie Maddoff look like Les Miserables’ Jean Valjean when he robbed the little boy of one sou … a history lesson today’s students do not understand because the ECB and the Euro [like the Fed and the US$] have made certain nobody remembers [or dares to say aloud] the financial history and wisdom of the ages. And, by the way, education will never be “free”. This is all DoubleSpeak from the Ministry of Truth [for those students who read Orwell’s “1984”].
Those pesky taxes
Remember how we noted above that Washington was not collecting enough “taxes”. Well, as it turns out, since 1971 Washington has bridged its fiscal gap by having the Federal Reserve “counterfeit” US$ … what Keynes euphemistically labelled “debauching the currency”. I prefer to call it what it is … counterfeiting. They argue that it is legal … I say it is neither constitutional nor legal and I sued the Federal Reserve in 2015 in US Federal District Court in Kansas. My case is recorded in the blog FROTH.
In any case, counterfeiting ALWAYS impoverishes many [in this case Labor] to enrich a few [in this case Capital]. This depraved monetary policy explains why subsidized [crony] Capitalists could economize on Labor expenses so ruthlessly for so long … impoverishing Labor. As it turns out, the counterfeiting was a “hidden tax” on Labor in America and around the globe … wherever people got and held their wealth primarily in wages and currency … and all wages and currencies are tied to the counterfeited US$ [as the world’s reserve currency]. If/when you want to better understand these crimes read the FROTH blog for starters.
What to do now
“OK” you say … “I agree with you. Labor has been robbed for 50 years. But what should we do now about student loans that cannot be paid?” I understand your pain, but before I answer you, tell me this … “Which is worse, evil or ignorance?”:
“Men naturally rebel against the injustice of which they are victims. Thus, when plunder is organized by law for the profit of those who make the law, all the plundered classes try somehow to enter—by peaceful or revolutionary means—into the making of laws. According to their degree of enlightenment, these plundered classes may propose one of two entirely different purposes when they attempt to attain political power: Either they may wish to stop lawful plunder, or they may wish to share in it.
“Woe to the nation when this latter purpose prevails among the mass victims of lawful plunder when they, in turn, seize the power to make laws! ... [for] instead of rooting out the injustices found in society, they make these injustices general. As soon as the plundered classes gain political power, they establish a system of reprisals against other classes. They do not abolish legal plunder. [This objective would demand more enlightenment than they possess.] Instead, they emulate their evil predecessors by participating in this legal plunder, even though it is against their own interests.
“It is as if it were necessary, before a reign of justice appears, for everyone to suffer a cruel retribution—some for their evilness, and some for their lack of understanding.”
As a practical matter here are my proposals in order of importance … don’t skip steps:
Abolish the Federal Reserve banking system and force Congress to take back its exclusive constitutional duty to regulate the currency and the federal debt openly and transparently and to collect taxes without using counterfeiting to hide them.
This systemic change will unleash powerful and virtuous endogenous sociological processes that will rapidly restore America’s “metabolic equilibrium” [including middle class democracy] and in so doing address a plethora of social ills [beyond student debt] that are all common symptoms of the same underlying monetary/tax cancer.
Revoke all government liability for and guarantees of student loans … just as Nixon revoked the gold guarantees in the Bretton Woods Agreement in 1971 … [and listen for the screams from those who would abuse children for profit].
Permit students to discharge their student loans in bankruptcy like any other debts as they see fit … they are adults responsible for themselves and answerable to their communities.
Learn and remember to NEVER trust Washington again with our common currency unsupervised.