The solution to America’s student debt problem.

My favorite fountain of economic ignorance, the Libertarians, write about the student debt problem.

Senate Democrats Want Biden To Unilaterally Forgive Billions of Dollars in Student Loans
Legally, he might be able to do it. Fiscally, he shouldn’t.
MIKE RIGGS | 11.17.2020 3:10 PM

With Democrats staring down the possibility of Republicans maintaining control of the Senate, Sen. Elizabeth Warren (D–Mass.) and 12 other Democratic Senators want President-elect Joe Biden to forgive hundreds of billions of dollars in student loan debt by using the Education Department’s power “to modify, compromise, waive, or release student loans.”

Warren promised during her own presidential campaign that she would, if elected, “direct the Secretary of Education to use their authority to begin to compromise and modify federal student loans consistent with my plan to cancel up to $50,000 in debt for 95% of student loan borrowers (about 42 million people).” It appears she’d like Biden to do the same.

Aside from the question about whether a President has the power to cancel any amount of student loan debt, why just $50,000? Why only 95% of students?

Much of the rationale probably goes to the “Who will pay for it?” question, a question that in itself demonstrates ignorance of federal financing.

Just to reiterate what has often been revealed in this blog, no one pays for a Monetarily Sovereign government’s spending. To pay for anything, our federal government, which unlike state/local governments is Monetarily Sovereign. To pay for anything, it creates brand new dollars, ad hoc.

Despite those misleading “debt clocks,” and warnings about federal debt being a “ticking time bomb,” your federal taxes do not pay for federal financial obligations.

In fact, federal taxes pay for nothing. Future generations of federal taxpayers will pay for nothing. Federal tax dollars, unlike state/local tax dollars, are destroyed upon receipt. The moment they are received they cease to exist as part of any money-supply measure.

This would be quite a gift for many student loan borrowers who still have outstanding balances (myself included).

As the Manhattan Institute’s Beth Akers noted last year, the typical four-year college graduate completes their degree with less than $30,000 in student loan debt.

Meanwhile, the College Board’s most recent effort to calculate the lifetime earnings premium of a college degree finds that the average four-year degree holder makes $400,000 more over their working lifetime than someone with just a high school diploma.

In 2015, researchers Christopher R. Tamborini, ChangHwan Kim, and Arthur Sakamoto published a paper in Demography that measured the 50-year lifetime earnings gap between high school graduates and bachelor’s degree holders at $896,000 for men and $630,000 for women.

In 2011, Georgetown University’s Center on Education and the Workforce pegged the B.A. earnings premium at $964,000. Whether the premium is shrinking or we’re just getting better at measuring it—or some combination of both—it’s still a good return on what comes out to roughly $7,000 in interest for borrowers who repay the average-sized loan in the standard 10-year timeframe.

While the “typical” (median?) four-year graduate may owe “only” $30,000, that isn’t the whole, financial point.

1. Many students graduate owing far more than $30,000
2. Even students with “only” $30,000 in debt may have been depleted financially if they paid cash for as much as they could, so as to minimize the student debt.
3. Some students can’t afford to repay even $1 in debt.
4. Attending college also has a hidden cost: Students are less able to earn money while in school, so the difference between what they could have earned and actually earned is one, often unrecognized, cost of college. It is the reason for Step #5 in the Ten Steps to Prosperity — Salary for Attending School (below). Many families do not want their children to attend college, because of the need for current income.

While federally issued and guaranteed loans have made it possible for the poorest Americans to attain education, those subsidies have also driven up the cost of education at a rate multiple times higher than inflation.

It is also now quite clear that making student loan debt easy to accumulate but nearly impossible to discharge in bankruptcy has helped millions of students get ahead while enabling a smaller (but still large) number of students to borrow money they can’t repay in order to purchase degree programs they can’t complete, can’t utilize, or can’t recognize as crap.

Loans have not made it possible for the poorest Americans to attain education. Some families need their young people to work, and bring dollars into the family. These families discourage finishing high school, much less than attending college.

The U.S. federal government never should lend dollars to anyone, much less to students. The government neither needs nor uses paid-back dollars. It already has infinite dollars. If the government deems any project to be worth financial support or encouragement, it should give, not lend, money to that project.

The sole function of lending to students is to tie a repayment anvil to their ankles at the time of their greatest money need for business creation and entrepreneurship.

As for the “degree programs they can’t complete, can’t utilize, or can’t recognize as crap,” this is akin to the old, childish, “Why do I have to learn algebra” complaint. Schooling has many benefits, most of which are realized only much later, if ever.

For many students in elementary school, algebra, history, art, sports, etc., etc. never are used in later life. Yet they are taught. Why? Because no one knows which people will benefit from which courses. The same is true of a college education.

The more people who attend college, the more likely some of them will use what they learn, and the more likely benefits to society will accrue.

Additionally, college is a time of life-learning and maturation, among young people of common ages, while being instructed by adults. It is a time of learning how to learn, rather than merely carrying forward ignorant beliefs from generation to generation.

Actually people who borrow the least amount of money that have the hardest time repaying it:

Defaults are concentrated among the millions of students who drop out without a degree, and they tend to have smaller debts. That is where the serious problem with student debt is.

Students who attended a two- or four-year college without earning a degree are struggling to find well-paying work to pay off the debt they accumulated.

That is the “anvil tied to the ankles” we mentioned. These drop-out students struggle to find well-paying jobs, even under the best of situations. But being also liable for debt repayment can lead to destitution.

And many of the drop-outs occur for financial reasons, a self-fulfilling burden on the poor, whose major crime is wanting to extricate themselves from poverty and believing a college education could help.

If the Education Department forgave up to $50,000 in student loan debt for every borrower, it would be helping many people like myself who don’t need it at the expense of the public fisc (and where is the “free” money for people who paid off their student loans, or haven’t gone or won’t ever go to college?).

The “public fisc” presumably is the U.S. Treasury, which never can run short of dollars. The “public fisc” easily could fund millions, billions, or trillions in additional expenses, simply by creating the money.

And then the author, Mike Riggs, offers the, “If I can’t get mine, he shouldn’t get his” reason for the elimination of federal spending.

The foundation of Libertarianism is to oppose all government and all government spending as being “too much. Because all government spending goes to some people and not to others, it all can be criticized on the basis of “If I can’t get mine, he shouldn’t get his.”

This devolves to zero government and zero government spending, which presumably is what Libertarians want.

The stimulus effect would likely be small, considering that the money a liberated borrower would now have to spend on something other than student loans is not the full amount of the loan, but the monthly payment.

As with the COVID-19 stimulus checks, borrowers might bank that amount or put it toward other debts.

The first sentence is a confused mystery. The stimulus effect would be the amount of each loan plus future anticipated payments.

From Forbes, “There are 45 million borrowers who collectively owe nearly $1.6 trillion in student loan debt in the U.S.”

If 45 million students each were given $50,000, that would be an immediate infusion to the economy of $2.7 Trillion. Or if those students merely were given what they owe, that would amount to a $1.6 infusion to the economy. This is not “likely to be small.” It would be a significant stimulus to the American economy, as well as to the individuals receiving the money.

And even if much of the money is banked or used to pay off other debts, it still is a stimulus to the economy.

The most libertarian policy preference in my view is two-pronged: get the federal government out of the lending and guaranteeing game, and make student loan debt reasonably dischargeable in bankruptcy.

These two policies would realign the incentives of colleges, lenders, and students to bring down prices and saddle fewer potential students with loans they are unlikely to repay.

The Libertarian policy always is to reduce government, no matter the current size. They have the weird belief that federal spending takes away their freedoms, which is utter nonsense.

Do government-funded roads, bridges, dams and streets take away your freedoms? What about the government-funded military, fire departments, and police departments?

How about the government agencies that assure safe food, safe air travel, national parks, museums, and schools. And then there is the government-funded judiciary, Congress, national banks, CIA, FBI, NASA, and the myriad other government agencies that protect our lives?

And then comes the Libertarian solution: Make bankruptcy easier. That is, cheat non-government lenders while lowering your credit score, making future borrowing more difficult. Perfect.

If that is a bridge too far for Biden and a Democratic Congress—and it probably is, considering those policies would also make it harder for low-income students to borrow and the market upheaval would probably snuff out a significant number of schools—Dynarski’s writing has convinced me that rethinking repayment timeframes is an acceptable middle way:

One solution is to lengthen the timeframe of loan repayment. In the U.S., the standard is for borrowers to repay their loans in ten years. Other countries let students pay back their loans over a far longer horizon. In Sweden, students pay their loans back over 25 years. For a $20,000 loan with an interest rate of 4.3 percent, this longer repayment would mean a monthly payment of $100 instead of $200.

This is the classic “Lower your payments” scam, which is accomplished by lengthening the payment period. The credit card companies use this scam when they tell people they can pay a minimum amount every month for many years.

Borrowers with very low earnings will struggle with even a payment of $100. Some countries, including England and Australia, therefore link payments directly to income, so that borrowers pay little to nothing during hard times.

Income-driven repayment (IDR), various forms of which U.S. borrowers have been able to apply for since 2009, caps your monthly payment as a percentage of your income and extends the repayment period from 120 months to 300 months. Make 25 years’ worth of payments under any one of several IDR plans, and your balance is forgiven, with the forgiven amount taxed as income.

People with very low incomes, who barely can pay their rent or put food on the table, will be required to pay an unaffordable amount for the rest of their lives, thereby dooming them to poverty, forever.

Some estimates predict 33 percent of IDR participant will fail to pay off their balance after 25 years, but the amount they pay over 300 months could still exceed the amount they borrowed for all but the poorest loan holders (and you’re not getting blood from those stones no matter how hard you squeeze).

Based on typical Libertarian economics ignorance, the author thinks liberty and freedom must be paid for by impoverishing the populace, rather than by a government that cannot be impoverished.

In summary:

1. All school loans should be paid off
2. Free school should be made available for all ages, all income groups, and all levels, not just for grades K-12. This will enhance America’s  standard of living and international competitiveness.
3. The dollars spent will stimulate economic growth
4. The federal government easily can pay for it all without levying any taxes.
5. The cost of scholarships will be eliminated, allowing schools to devote more financial resources to teachers’ salaries and to educational hard assets (modernization of buildings, electronics, student transportation, etc).
6. Contrary to popular wisdom, federal spending for college does not represent a transfer of funds from the middle-classes to the upper classes. It does not represent a transfer from anyone. It represents a transfer from the federal government to the economy.

Rodger Malcolm Mitchell

Monetary Sovereignty Twitter: @rodgermitchell Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..

THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.

The most important problems in economics involve:

1. Monetary Sovereignty describes money creation and destruction.
2. Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics. Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:

Ten Steps To Prosperity:

1. Eliminate FICA
2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
3. Social Security for all or a reverse income tax
4. Free education (including post-grad) for everyone
5. Salary for attending school
6. Eliminate federal taxes on business
7. Increase the standard income tax deduction, annually. 
8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
9. Federal ownership of all banks
10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.

MONETARY SOVEREIGNTY