What to Do About the Student-Loan Fiasco: Is “Debt Forgiveness” Really the Answer?


by Wolf Richter, Wolf Street:

The University-Corporate-Financial Complex is going to squeal.

This is the transcript from my podcast last SundayTHE WOLF STREET REPORT:

OK, I’m going to wade into this debate. And I’m going to do it with my boots on.

The student loan fiasco – the pile of debt that has ballooned to $1.6 trillion – and what to do about it – particularly how much of that student debt to forgive at the expense of taxpayers – has now entered the list of presidential campaign promises.

These promises of student-loan forgiveness are efforts to buy votes at the expense of the rest of the taxpayers, whose money this is, on the principle that whoever proposes the biggest debt-forgiveness will get the most votes from those graduates and their parents.

I can’t blame them. It’s just too juicy a low-hanging fruit. If I were a politician running for office, I’d promise the same damn thing, and that’s why I’m not running for office.

But this $1.6 trillion is an asset on the government’s books. It was funded by tax receipts and debt that the government issued. If hypothetically, all students paid off their federal student loans today, the gross national debt would drop by 7%, from $22.5 trillion to $20.9 trillion.

Forgiving these student loans wipes out that asset, but the national debt that funded these student loans remains. That’s how that would work. There are no freebies, when it comes to debt.

But ultimately, any proposal of student-loan forgiveness is merely another massive giveaway by taxpayers to what I’ve come to call the University-Corporate-Financial Complex. Because students – who’re not yet aware of the financial shenanigans they’re being drawn into – are merely a pass-through conduit for that money from taxpayers to the ultimate recipients.

How much money are we even talking about here?

A lot more than meets the eye. Currently there are $1.6 trillion in student loans outstanding. That is only the debt that has not yet been paid off or been written off.

But most graduates work hard to pay off their student loans, and they’re making progress. Each time one of these graduates makes a payment, it reduces the pile of student loans outstanding. And when that graduate has finally paid off all their student loans, those loans are no longer part of the outstanding balance.

The thing is, there is a lot more new loans being taken out than old loans are being paid off.

So that $1.6 trillion in outstanding student loans is just what is currently owed. It’s not the total amount in money that students borrowed and turned over to the University-Corporate-Financial Complex. That total is trillions of dollars over the years. It’s a huge flow of money.

It’s debt-financed consumption pure and simple. But this branch of debt-financed consumption is guaranteed by the taxpayer, no questions asked.

You don’t have to have good credit to get a student loan, and you don’t have to have income, you don’t even have to prove that you will have income that will allow you to pay back the loan. You just need to be a student – and you don’t even need to be preparing for a profession that would earn you enough to where you could pay back the loan.

And then you spend every penny of this borrowed money. Some of it goes to the school for tuition, and perhaps room and board, and fees. Other students use it for off-campus housing, and these rent payments go to private landlords.

Everyone is forced to buy textbooks – and that is one of the worst rip-offs out there with a monopolistic structure. Often, textbooks are “updated” and changed in such a way that used textbooks become hard to deal with or useless. Electronic textbooks are designed so that they cannot be transferred to others. They’re ridiculously expensive. The textbook publishers are getting rich and fat. And the student pays for them with student-loan money.

Everyone needs a computer these days because a lot of work is done on a computer and submitted electronically. And they need software. And everyone needs a smartphone. Etc. And all these things are paid for with student-loan money. Apple is better at sucking up this moolah than any other company in America.

Then there are the fast-food chains on and around campus, and you have to eat, and so more student loan money goes to corporate America.

And the grocery stores, the ticket vendors, the apparel vendors, the airlines when you go back home, or when you go on spring break. And you may need a car and gasoline, and so on.

Then there are the universities themselves. They’re now vast properties with expensive buildings, enormous parking lots and parking garages, huge athletic complexes, and astonishingly beautiful administrative buildings.

Lower-level instructors and associate professors don’t get paid a lot, but top administrators, university hospital doctors, and coaches do get paid a lot – often well over $1 million a year, going up into the multiple millions of dollars.

Campuses are constantly expanding as universities buy new properties. And new buildings are being built, and the whole real-estate and construction industry is profiting from this.

And Wall Street has its fingers in this pie because these places need to be funded and the loans for the properties need to be securitized. And the companies that supply the students need to issue bonds and stocks and so on. And the whole educational system needs to be financialized.

Read More @ WolfStreet.com