Student Debt Forgiveness: Some Thoughts
Taking a quick time out from my larger macro piece for a brief “news of the day” commentary.
Today the Biden administration announced a partial student debt forgiveness plan. Before getting to the specifics, I want to point out that I did a long form piece called The Student Debt Debacle for my old website that predates this Substack. That piece has been paywalled for some time but I’ve unlocked it for everyone to reference as I borrow some of the same themes for this article. You’ll see some quotes from that article throughout this post. Despite being nearly 2 years old, I think the whole article is worth a read and I have no intention of re-writing the entire thing here today. In it, I talked about the student debt problem and detailed a staggeringly expensive plan that I would have proposed in an attempt to end it.
My opinion on student loan forgiveness is actually a bit more nuanced than what I’m generally seeing online today. I don’t know if it qualifies me more or qualifies me less to have an opinion, but I didn’t pay for my education. My parents did. I had a little academic money as well but my mom and dad paid for my bachelor’s degree. While I worked numerous part time jobs the entire time I attended school and during the summers in between school years, the money I earned was used for the fun stuff I did. My parents had tuition, text books, and dorms covered. I’ll be forever grateful for that and there can be little doubt that it set me up for the future better than many other kids my age.
But I never paid the bills. So I’m entirely on the outside of what has become another party line political battle. I’m not crippled financially by student loans and I didn’t personally pay with my own savings or through financing. Now, if you ask my parents, or anyone who has paid off student loans, you’re going to probably get a justifiably strong negative reaction to today’s news.
That news? Up to $10,000 in student debt “forgiveness” for anyone who doesn’t make over $125,000. Up to $20,000 for Pell Grant recipients. Estimates have the total cost of this at $300 billion or so. While I think it could be argued that this is yet another stunt by the administration to create mid-term voting enthusiasm, I’m going to overlook that to make a larger point.
At the risk of irritating some of my loyal readers, let me explain why I’m actually fine with this. Not all, but a lot of young people who are now trapped in this debt were bamboozled and there is quite a bit of blood on the hands of Uncle Sam.
the Education Department borrows the money from the US Treasury and then re-lends it to students at a higher rate. The government keeps the spread. You see where this is going, right? The government has a financial interest in children borrowing money.
Getting Americans out of debt serfdom to the state is a good thing, not a bad thing. Is this unfair for people who paid off their loans or opted not to go to college at all because of the cost? Yes. Are some of the people getting this bailout the ones who took absolute joke majors with no prospects for legitimate earnings from those degrees? Yes. Both of these are bad outcomes in my view. If I were Biden, would I have handled this differently? Yes. Is there a lesson to be learned from all of this if you’re in high school right now? Yes. Don’t ever take the advice of someone standing to benefit from your decision without doing your own research and understanding the financial motivations of every party in the room.
Lenders and the federal government have spent the last 50+ years giving teenagers who didn't know better unsecured loans to finance degrees they may not have actually needed. Lending has been made easy thanks to cheap credit from the federal reserve. Too many borrowers were convinced by parents, institutions, and prospective employers they needed college to succeed.
I’m happy for the people who I know personally who will be positively impacted by this. I hope they learned something. I feel terrible for the people who made tough decisions like not traveling with friends so they could honor their financial obligations. They did the right thing and they get nothing out of this deal. I hope they aren’t emboldened to make poor financial decisions because of this.
If private banks are the ones who really print dollars using federal reserve collateral that can't actually be withdrawn, then colleges and universities are the ones who have been essentially printing this student debt.
Finally, I think the most productive way to react to today’s news is to accept that we are way passed any possibility of fiscal austerity. Moral hazard is already deeply embedded in K Street, Wall Street, and yes even Main Street thanks to the $400 billion in debt forgiveness via the fraud-tastic PPP loans.
the money wasted on useless degrees is about 4 times the high-end damages estimate for Bernie Madoff’s Ponzi scheme. And he was thrown in the clink. So it's no wonder people saddled with this debt want it wiped out.
As taxpayers and citizens, we need to understand that we are using a doomed currency. It is inevitable. There is no stopping what is coming. We absolutely need to have these kinds of conversations about money, debt, and what actually creates inflation. When we do that, we’ll understand why we’re in the mess we’re in. But start considering inflation hedge assets if you haven’t already. This is just getting started.
For those of you who don’t follow my every move and tweet but are generally interested in what I do, I was a guest on Seeking Alpha’s Stock Market Live! stream today. We talked all about crypto. It was a lot of fun! Check it out:
Disclosure: I’m not an investment advisor. I merely share what I do and why I do it. You shouldn’t take anything I say as investment advice and always do your own research when making investment decisions. Cryptocurrencies, tokens, STONKs, and digital trinkets could all go to zero. I have no job and I live in my wife’s basement. I’m the last person on the face of the earth who you should listen to for financial advice or life advice.
And another $3 billion for Ukraine. They can’t get us to hyperinflation fast enough!
Honest question here (from someone who paid off my college loans, which were small because I had a large scholarship, and someone who has put two kids through college and currently paying for two more in college.) You're right, I'm not okay with this for a variety of reasons (some fiscal, some political -- i.e. selective "help" to those individuals deemed "worthy" by the Democrats.) But my PRIMARY reason for disliking this loan forgiveness is because there is no incentive for colleges to fix their problems. The price of college has increased exponentially compared to other goods and services. Administration has grown to equal or exceed academics. Colleges encourage kids to take out these loans and have no incentive to provide them with a quality and useful education so they have the resources to pay back the loans. SECONDARILY, the kids who have the loans were the sole beneficiary of the loan, yet the 87% of taxpayers who didn't benefit (and either paid their loans or didn't take loans or didn't go to college) are "paying" for it.
I don't understand finance and economics like you, and I agree (after raising 5 kids!) that something needs to be done about these loans and the push to get kids to take out loans they'll never be able to repay. I think loans should be reserved primarily for advanced degrees (medical school, law school). That said, I would suppose something like forgiving the interest (but not the principle) and also something to make colleges accountable for their actions.