Consider idea of student loan ‘debt jubilee’
Forgiving consumer debt has different consequences from student loan debt
The caps have landed, and the cheers have faded. But, as an Associated Press report in the June 6 Albuquerque Journal Outlook rightly suggests, what’s now left of the university experience is the fear of opening the mailbox.
Federal Reserve Bank estimates put student loan debt at over $1 trillion. An April 2016 Wall Street Journal report indicates the rate of default, delinquency and postponement on these loans runs higher than 40 percent. The socioeconomic ramifications of such debt stretch well beyond GDP growth headwinds to include long-term individual financial fragility, the consequences of delayed household formation, and even, perhaps, romantic partner selection based on debt levels of potential partners, thus exacerbating wealth concentration.
As the adage holds, “debts that can’t be repaid won’t be repaid.” Historically, our national economic fortune has been made possible by “growing our way” out of financial difficulties. How, though, can the difficulty of the student debt problem be solved by growth, when growth is obstructed by the debt itself? Perhaps unorthodox solutions should be considered.
Of such whispered policy solutions, the most quietly voiced would have to be that of student debt forgiveness — a so-called “debt jubilee.” For debts that won’t be repaid, that would not be unprecedented. Since the first recorded use of debt roughly 5,000 years ago in Mesopotamia, the use of the “jubilee” to expunge unpayable debts has occurred across cultures and with some frequency.
If ever uttered in circles of policy wonks, any discussion of a “jubilee” on student loan debt would surely be silenced by two words: moral hazard. These words conjure thoughts of the collapse of Bear Stearns and Lehman Brothers. When a borrower does not face the risk associated with a loan, no disincentives exist to continued borrowing. With risky behavior validated, it is likely to be repeated.
A distinction, however, must be drawn. Student loan debt is qualitatively different from consumer debt. A borrower takes student loans on for a singular purpose: a diploma. This is a largely onetime event, which, due to biological, social and institutional constraints, will never be replicated as with other forms of consumer debt incurred through acquisitive pursuits.
Just consider a 31-year-old woman with a Ph.D., a partner, a career, condominium rental payments and $100,000 of student loans. Would the forgiveness of these loans incentivize her to pursue additional diplomas? Juxtaposed, consider a financial consultant with a new boat, new SUV, and new entertainment system provided for by a generous line of credit well in excess of what his yearly salary can support. Would the cancellation of his balance incentivize him to remain a spendthrift? If the answers are anything other than “no” and “yes,” respectively, it would behoove you to invest in Chinese “ghost cities.”
One approach to implementing a “jubilee” would be for the creditors of student loans to accept a loan monetization. In large part, this would involve falling back on the U.S. government, which already is on the hook for student loans by virtue of backstopping nearly the entire loan portfolio. Under special Federal Reserve authority — much like that used to purchase mortgaged-backed securities through its ‘QE’ programs — the Fed could be empowered to purchase in monthly tranches securitized student loans at their underlying face value, thus holding repayment fulfilled and lenders protected.
A "jubilee" on student loan debt would only be the first step in addressing the challenges of financing higher education. While it would go a long way toward resolving the many socioeconomic problems associated with such a debt load, it would speak not at all to other important matters, like whether college education at public institutions should be free, or, perhaps, tuition scaled to income likely to be earned following certain fields of study.