I'm sure you've heard at least a hint of all the calls to energize the economy by forgiving student loans. To be straight-forward, I think this is an absolutely awful suggestion, fueled, in part, by my generation's refusal to take responsibility for our choices (further manifestations are, in my opinion, seen in my generation's views on religion, morality, abortion, intellectual property rights, alcohol, marijuana...).
Let me briefly outline the seemingly-brilliant idea: As of 2007 (and rising since), about 60% of America's 8,986,150 college students carry student loans with average debt per student as high as $22,700. On top of this, college students are now carrying record-high credit card debt, with the average balance (2009) of $1,645 and 21% of students carrying a balance between $3,000 and $7,000. The average student also has 4.6 credit cards to his name. With all of this debt on their shoulders, once students finish school and begin to produce and consume, they are crippled by this debt, forcing them to pour a large portion of their earnings into repaying student loans at "high" interest rates, fueling private banks (read: the "1%"). If student loan debt is forgiven, young college graduates will be free to spend this money in the economy or invest (save towards buying a house, for example), stimulating the economy without huge loss to the government or banks.
So, here's my problem with this whole argument, and it's not even my moral compass having a heart attack, screaming that students made a commitment and must fulfill their responsibilities. My problem, primarily, is an economic one. Let me go through the failures of this theory categorically:
- Not all debt is debt accrued for educational purposes.
Debt in America is sky-rocketing (dangerously, if you ask me) across all demographics, not just students, with the average credit card debt of an indebted household over $16,000 (as of March 2010), so why should students be any different? Holding debt is, apparently, becoming less and less costly (perhaps because society now accepts it as part of life and therefore it has lost much of the social stigma attached to being indebted in the past), so people are more and more willing to hold debt...at rapidly increasing rates. Borrowing doesn't begin once education begins. Despite what might be expected, taking out student loans is rarely the beginning of someone's indebtedness; only about 15% of college freshmen had a zero balance in 2008, the average balance being near $1,000. Something tells me (based on personal experience) much of that spending hasn't been on books, but instead on midnight IHOP runs, Chipotle burritos, shopping trips to the new and exciting mall, music festivals with friends, Greek organization dues, beer... Pardon me for not believing the government should pardon loans so that I can afford to buy more beer. - Issuing private loans on education is risky.
There's a reason interest rates are "high" on loans issued for things like education: it's risky. Unlike a loan used to buy a house or car, the education you receive can't be repossessed if you don't pay. There's no guarantee for a bank, nothing to cover their losses. Don't forget that banks are businesses, and businesses are just like people: we do nothing unless we can gain (or at least not lose) from it. A bank can't afford to offer loans that don't pay, or at least break even, so the higher interest rates help protect the bank in two ways: a) increase the payment on the loan, so even if you stop paying before you've paid it off, they can still be okay, b) weed out loan-seekers that value their education less, as only students who value their education at a rate equal to or greater than the interest rate will accept the loan. Because these students show dedication to their education, they are also more likely to show dedication to their commitment to pay back the loan.
Because private lending for education is so risky, the government has stepped in, offering government and government-protected loans to offset the risk to the bank. The government has chosen to take the loss if a student fails to pay back his loan because the government values the education of citizens very highly (potentially higher than students do, and probably higher than it should, based on the falling return to college degrees and rising college-graduate unemployment/underemployment rates). - Forgiven debt will not necessarily increase market consumption.
Really, the idea of forgiving debt isn't really new at all. It's been tried on the international scale to stimulate developing economies since the mid-90s, including a huge movement called "Jubilee 2000," calling for universal debt forgiveness for HIPCs in 2000. Except it didn't work. Like, at all. The problem with debt forgiveness revolves around two things: the root of the problem (is debt really the disease, or is it just a symptom?) and incentives. Forgiving debt does not change the relative cost of consuming vs savings, but merely increases income, so spending patterns don't change, just the volume. While this may not entirely be an issue with forgiving student debt (since the end goal is simply to increase consumption, the variety of which is irrelevant), it certainly doesn't aid our economy as proponents of the movement would like to think. Why? Because one of the primary instigators of the economic woes is consumers' poor consumption choices. Blame it all you like on predatory lending, but the fact of the matter is consumers chose to spend more than they had. Why would this change simply because they have more money to spend? The cost of borrowing has not increased (quite the contrary, it would decrease! I'll explain this more in my next point). People's preferences for consumption don't change because they have more to spend. A thrifty person that wins the lottery generally doesn't cease to be thrifty. - Debt forgiveness sets a precedent for future irresponsibility.
This is the biggest deal, in my opinion. This whole thing could be viewed as a bit of game theory, a game between students and the government. Who pays the loan? If this were a single, non-repeating game, the government could forgive the debts, set the books back to zero and start again, no lasting consequences because everyone will operate on the assumption that this will never happen again. Ever. But how does that work? This would set a dangerous precedent: the government forgave our debts before, they could do it again. While no one may consciously say this, recognizing its childishness, the underlying assumption that this could potentially be a repeating game will forever sabotage this plan. This, again, popped up with the Jubilee 2000 attempts. Why would individuals be any different than countries? - Who pays the lenders?
Frankly, money doesn't grow on tress. I think everyone knows this. So where does the money come from to pay the lenders? Lenders gave money to schools (via students) to pay for students' education, so who pays them back if the students don't? Here are our options: students (the designed payer), government (better known as taxpayers, aka you), schools or no one. Obviously we need not discuss the 'students' option, so let's discuss the government. So, regardless of whether the government pays private loan-issuers or simply forgives all government loans, the results are the same (the magnitude alone changing): a huge budget deficit. Money went out that won't come back. Who funds a budget deficit? Taxpayers. How do we fund a budget deficit? Raising taxes. Last I checked, student-loan holders also paid taxes, so their taxes are going to increase to pay for the loans their not paying. True, the burden will be lighter as more people are paying for their loan. But are you willing to pay even higher taxes to fund other people's education loans? Raising taxes seem to be a huge political problem already, so this may not be a politically viable option. So what about schools? Can't schools repay the loans they were paid with? I wouldn't expect a car lot to repay the loan I took out to buy a new Aston Martin or the guy from whom I bought a house to pay the loan I used to pay his mortgage. Asking a school to pay back the loans will effectively force the cost of tuition even higher, creating a vicious cycle.
So, what if no one pays the lenders? What if they're just wiped off the books? Well, from a private lender's perspective, hundreds of banks would go under, unable to get past the gigantic red marks all through their books. We've already seen banks collapse and require countless bailouts from the government. We can only imagine what would happen if we took ~$1 trillion out of their books from student loans. From the government's perspective, we're back to taxpayers. The 2012 election is already being characterized by the budget deficit and national debt. How will voters feel if we add about $1 trillion dollars to the equation? Likely, not good at all.
Those are my problems with student loan debt forgiveness. I'm sure it's not the best argued or researched and likely not unique, but it's my thoughts off the top of my head. I'm staunchly against this movement for the above reasons and open for discussion. The sources for the data quoted are below:
(American Student Assistance, Student Loan Debt Statistics, http://www.asa.org/policy/resources/stats/default.aspx)
(Creditcards.com, Credit card statistics, industry facts, debt statistics, http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php#Debt)
(Nerdwallet.com, American Household Credit Card Debt Statistics through 2012, http://www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/)
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