Your Student Debt will be Monetized

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Student debt cancelation is a good policy, but has unintended consequences.

Student debt has been a growing problem in the United States and an incredible burden for young workers and educated citizens. Ever since college loans have become federally guaranteed, the price of tuition has risen exponentially. When lenders do not feel any real risk of default from students due to the government promising to cover any costs which are not repaid by the borrower, the lenders become willing to make loans to anyone, with almost no restrictions (Nolo, What is a federally guaranteed student loan? 2021). This is good for those who otherwise wouldn’t have had an opportunity to go to school, but very bad for the overall cost of education. With no real restrictions on loans and no real need for a return on investment, schools start competing for students by becoming more fun, flashy, and large. We slowly get an education system where all students are competing to go to a few dozen large, well funded schools. The unrestricted demand for these institutions causes a skyrocket in tuition costs, and allows them to have an abundance of funding to pay for more fun, flashy, and large programs, and the cycle repeats. The real return on investment for an education trends lower and lower and the debt burden for those pursuing one grows larger and larger.

This cycle has created a huge problem for the younger generations. The success of an education for prior generations led to parents teaching their kids that college was something to pursue at almost all costs. Almost 40% of millennials have a bachelors degree or higher, compared to only around 15% of the silent generation and 25% of the baby boomers (Bialik & Fry, Millennial life: How young adulthood Today compares with prior generations 2022). Not only does this make the value of a bachelors degree decrease because of the increasing percentage of people who have one, but it also means that our younger generations are much more indebted than our older ones were because they chose to pursue it. Almost one-third of American students have to go into debt to finish college, and the average student loan debt per student reached a record high of $40,904 in 2021. Collectively, students in America owe about $1.75 trillion. (Kurt, Student loan debt: 2021 statistics and outlook 2022). In comparison to the national debt of roughly 30.5 trillion, this number is fairly significant. Right now many of these payments are still paused due to suspensions granted during the COVID pandemic. It will be very hard, if not impossible, to resume these debt payments. With over 64% of Americans currently living paycheck to paycheck, and over 40 million Americans holding that 1.75 trillion of student debt, it doesn’t take a genius to see that there will need to be some relief or bailout for students if our economy is going to survive short term.

Many people have been calling on Joe Biden to forgive student debt through the executive branch. Myself included. Different numbers have been floated around, whether it be 10 thousand per borrower, 50 thousand per borrower, or total debt forgiveness of all student debt. While there clearly needs to be action taken, there are two other factors to this which I think people need to be more aware of.

First, we need to end federally backed student loans. There is little point in addressing the massive amount of student debt if we maintain the same system which allowed it to become such a massive problem in the first place. We cannot allow it to simply build up again and continue on this cycle of creating indebted generations who need to beg the government for assistance. Allowing student debt to be forgiven through bankruptcy and allowing lending institutions to fail or be defaulted on would solve this issue. Under those circumstances, lenders will no longer issue 200 thousand dollar loans to 18 year olds, because it would simply be too risky and a poor return on investment. The price of tuition would fall greatly as it would be paid for less with debt and more with cash and equity.

Secondly, we need to remember that while debt is your liability, it is the asset of someone else. I can guarantee you that if the federal government takes action on student debt, they will not destroy anyone else's asset, especially considering big banks and commercial institutions own large amounts of these debt assets. Instead, they will do the traditional practice of monetizing the debt through government spending which is paid for by the federal reserve. Essentially, the 1.75 trillion owed by borrowers will become 1.75 trillion in cash in the hands of the lenders. This prevents the economy from blowing up due to almost 2 trillion in ‘wealth’ being forgiven, but also does little to actually help students be free of the costs of that debt. Instead of the individual paying for the cost on their own, or the lending institution paying for the cost of their poor investment through their failure, the entire system will pay the cost of our student debt. The 1.75 trillion which is monetized translates to about an instant 8% increase in the M2 money supply, and will work its way through the economy and bid up asset prices yet again. The ones who get the money first will benefit the most, and in this case it would be the companies which issue student loans. We will all then pay for that debt through higher housing, stock, land, and energy prices. This is the problem with an economy built on debt and systemic risk.

I am not against this, and in fact believe that it is the only realistic way out of the situation we are in. We just have to stay rooted in reality and remember to consider the second order effects of decisions like this. The monetization of student debt will benefit people in unequal ways, and the people it is supposed to help will still feel the cost of that debt through the costs of other scarce, valuable assets rising. As individuals, it is important to make smarter decisions for ourselves as well. Take debt seriously, take care of your health and your finances, and don’t store all of your wealth in a debt ponzi scheme which will require more and more frequent bailouts to survive.

Citations:

Bialik, K., & Fry, R. (2022, April 1). Millennial life: How young adulthood Today compares with prior generations. Pew Research Center’s Social & Demographic Trends Project. Retrieved May 24, 2022, from https://www.pewresearch.org/social-trends/2019/02/14/millennial-life-how-young-adulthood-today-compares-with-prior-generations-2/

Kurt, D. (2022, May 12). Student loan debt: 2021 statistics and outlook. Investopedia. Retrieved May 24, 2022, from https://www.investopedia.com/student-loan-debt-2019-statistics-and-outlook-4772007

Nolo. (2021, July 12). What is a federally guaranteed student loan? www.nolo.com. Retrieved May 24, 2022, from https://www.nolo.com/legal-encyclopedia/what-is-federally-guaranteed-student-loan.html