The economically harmful student loan program

Almost exactly a year ago, we published “Cancel student loan debt?” It included the following points, which also were part of the post titled, “Free education for everyone” from February 9, 2017.

1. Educating our young people is important to the future of America.
2. For that reason, free elementary education has been provided by every state and every town in America.
3. Since WWII, America’s need for college-educated young people has grown, in a more sophisticated, more competitive world. College-educated students no longer are a luxury for America; they are a necessity.
4. Many of America’s bright students are unable to afford a college education, especially not in better colleges.
5. The U.S. federal government is Monetarily Sovereign, meaning it creates dollars at will. It never can run short of dollars. The federal government has the unlimited ability to pay for anything priced in dollars.
   Alan Greenspan: “A government cannot become insolvent with respect to obligations in its own currency.”
6. The federal government’s responsibility is to advance the interests of the United States and its people.
7. Putting America’s young people into debt, a debt so suffocating it cannot even be discharged in bankruptcy, does not advance the interests of the United States and its people.

Today, I saw an article that makes the case for the elimination of all student loans in favor of direct, no-repayment-necessary financial support.

The Government Makes a Profit on Defaulted Student Loans
Posted on February 23, 2023 by Yves Smith

Finance people will immediately recognize that outside of loan-sharking, lenders showing profits on defaulted loans is unheard of. Yet Uncle Sam is doing a very good job of kneecapping student borrowers who have trouble repaying.

As this post explains, this is predatory lending in action.

As we often have discussed, it makes no sense for the U.S. federal government ever to lend dollars and expect repayment.

Alan Greenspan: “There is nothing to prevent the federal government from creating as much money as it wants and paying it to somebody.”

The government is Monetarily Sovereign. It has the unlimited ability to create dollars. Given that infinite ability, the government never should ask anyone to pay it dollars, whether in loan repayment, taxes, or for goods and services.

Think about it. If you had the infinite ability to create dollars at the touch of a computer key, why would you ever ask anyone to pay you dollars?

I have known Alan Collinge of Student Loan Justice for multiple years now. He has been prompting some type of relief for those who will never be able to pay back these loans or are in default.

For the over 62 tack on another $20 billion for EOY 2022. Three hundred- thousand more people are in this category. The average amount of time to pay back was 15 -17 years at $250/month.

From over 50 and above, these debts will never be paid 100%.

In 2010, we found the federal government was making a profit, not a loss, on defaulted student loans.This is a claim no other lender for any other type of loan (including governmental loans) can make.

Not only does a Monetarily Sovereign government have no need or purpose in lending, but our Monetarily Sovereign government actually collects profits on its defaulted student loans.

Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

Thus, the student loan program impoverishes the private sector but does so for no reason at all. The dollars are taken from the economy and destroyed.

“More recent White House Budget data shows that this is still true today The profitability of student loan defaults is certainly far greater today than in 2010. Making a profit on defaulted loans is a defining characteristic of a predatory lending system. 

The 2010 White House Budget reported a recovery rate on defaulted FFELP (federally guaranteed) loans of 122%.

All other loans the government made or insured that year had an average recovery rate of about 34%. No other loan types exceeded a 100% recovery rate, or even came close.

At the time, the large majority of all federal student loans were of this category, where the government does not make, but rather guarantee.

There is no other lending system in existence in this country where the lender can claim to be making a profit on defaults.

A loan portfolio which accrues nearly $100 billion in annual interest, where loans in default are actually profitable and very few loans are being cancelled as is the case with the federal student loan program.

It is literally impossible to lose money on these loans. The program can only be making money from the defaults and a lot of it.

All of this profit for loans, President Lyndon Johnson said would be “free of interest” when he signed the Higher Education Act into law in 1965.

And yet, the federal government neither needs profits nor even keeps the profits it receives. Every U.S. dollar coming in to the U.S. Treasury is destroyed upon receipt.

The interest dollars paid to the Treasury come from the M2 money supply measure, which is reduced by each interest payment.

But because the federal government is Monetarily Sovereign, there is no money supply measure to tell you how much money the federal government has. It has infinite money. Thus, the dollars are destroyed.

Alan Greenspan: “The United States can pay any debt it has because we can always print the money to do that.”

Default profits depicted . . . .

What is most disturbing: The default rate for people leaving school in 2004 is estimated to be 40%, and is likely a low figure since the estimates were based on voluntary surveys.

Moreover, even before the pandemic, 85% of all federal student loan borrowers were underwater (ie not paying, or paying but with an increasing balance) on their loans, and nearly 60% weren’t making payments.

With 3 years of nearly universal non-payment due to the pandemic, this non-payment rate will escalate when repayment is again demanded from the borrowers.

It is not at all unreasonable to expect that 70% or more of these borrowers will wind up in default on their federal loans when the system is turned back on.

The student loan default is many multiples of the sub-prime home mortgage default rate of 20% in comparison.

So, by all rational metrics, this lending system is in catastrophic failure.

The Monetarily Sovereign, U.S. government never should lend. It only should give. The government neither needs, uses, or even keeps the dollars it receives from students.

When the government wishes to provide financial encouragement to any purpose, it always should give the money. It never should ask for money to be returned.

Sending dollars to the federal government impoverishes the economy but does not enrich the government.

We believe it to be not at all unreasonable to expect that 70% or more of borrowers will wind up in default on their federal loans when the lending system is turned back on.

Unprecedented, and unwarranted of both bankruptcy rights, and statutes of limitations lie at the core of the student loan problem.

No, the core of the student loan problem is ignorance of Monetary Sovereignty. The public, and perhaps most of Congress, do not understand the implications of “unlimited ability to create its own sovereign currency.”

These are not typical loans. They are Monetarily Sovereign loans.

Those who do not understand Monetary Sovereignty do not understand economics. 

There is no economic purpose for the federal government to lend dollars, then impoverish borrows by demanding the dollars’ return.

In the absence of these protections, the lending side (up to and including the Department of Education) can- and does use this power to extract vast sums of wealth ruining the lives of borrowers, (one example below).

The human cost of the predatory lending system has been massive. The harm that is poised to be exacted on the citizenry is incalculable.

One example of the people who have been harmed by these loans:

This cannot and should not continue. At a minimum, constitutional bankruptcy rights must be returned to these loans.

The catastrophic proportions of this failure, however, are such that it probably would be best to simply cancel the loans, end the lending system, and replace it with a more rational, rationally priced, and fair higher education funding plan.

Rodger Malcolm Mitchell
Monetary Sovereignty

Twitter: @rodgermitchell Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

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The Sole Purpose of Government Is to Improve and Protect the Lives of the People.

MONETARY SOVEREIGNTY

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The following is copy for a petition Student Loan Justice asks you to send to your federal representatives”