The Student Loan Crisis – A Different Perspective
What follows is a clarification of a plan for dealing with a rising student loan bubble that can be fixed to our benefit. Read this through and do the math for yourself – you’ll see what I mean. Before I dive in, let me begin with a quote from Thomas Jefferson’s “Bill for the More General Diffusion of Knowledge,” Dec. 1778
experience hath shewn, that even under the best forms, those entrusted with power have, in time, and by slow operations, perverted it into tyranny; and it is believed that the most effectual means of preventing this would be, to illuminate, as far as practicable, the minds of the people at large,…
I will provide a few quotes from Thomas Jefferson throughout this article as a reminder that Thomas Jefferson believed in universal education because he was convinced that an educated society could remain free. He knew that ignorance was an enemy to both the economy and liberty. He tried desperately to ensure that education was a founding principle. My, how times have changed.
Christopher A. Sims, a Nobel laureate in economic science, recently told the annual conference of Central Bankers that increased government spending was required to lift the world’s major economies from stagnation; a Keynesian imperative, unfortunately. Some are suggesting bailing out banks and corporations, some suggest spending this money on infrastructure, while others, like Jill Stein, suggest something else altogether. Who is right?
I believe Jill Stein presents a good point for consideration when she called for the cancellation or purchase of all student debt. Of course, her critics pounced on her for her comparison of the Fed buying up the housing debt, but perhaps there is something to consider here, and perhaps her critics were missing her point. What if I told you that our nation would actually benefit from such a move?
Before you get all “huffy-puffy,” let me make it clear that technically the Fed has the ability to buy debt and forgive it or even to buy it and figure out a way to monetize it if they wanted to. You have to remember that the Federal Reserve is a private institution; it’s a bank for the banks, and they do (unfortunately) have a lot of power. For instance, they have the power to create money out of thin air in an effort to prevent collapses, and they can buy up debt if they want. Remember when the Fed bought mortgage-backed securities from the big banks as a way of injecting more cash into the financial system? That is just one example.
But here’s the deal; it’s not the Federal Reserve’s responsibility to deal with government-backed education loans; it’s actually the government’s. I know what you’re thinking: “It’s the student’s fault!” But is it really? Think about this: it was the government that set main-street up to fail, which in turn, made any remaining jobs more competitive, which prompted many to get back into school because the government said it would make them more competitive. Meanwhile, the government has been pushing for drastically higher education rates in light of the extremely high ignorance level in this country as compared to other nations – which, ironically enough, is borne out of government-run schools. It’s not really the student’s fault at all; they were pushed into it.
Regardless, the government probably has the authority to do this – at least with a little congressional help. The government actually has a history of bailing certain institutions out for the betterment of the economy. This can often happen if the government can see some sort of return in their future – ignoring for a moment that the government somehow turned into a for-profit organization – that can be dealt with later. In fact, as a result of GM’s 2009 bankruptcy, the government’s $50 billion investment was converted to a 61 percent equity stake, plus preferred shares and a loan. The point is that there is a precedent of intervention.
So what about student loan debt? Well, let’s look at the actual goal here. If you follow the news, economic info, or related information, you already know that one of the biggest goals we have right now is to stimulate economic growth. Our economy is dying. This is in part because nobody has any money to spend on goods or is reluctant to spend because they fear recession or depression. This means that money is not being circulated. The little money that is being spent is usually on necessities – and even then, that shopping list is comprised of cheaper foreign goods – which doesn’t help.
Even start-ups are dying. Fareed Zakaria from The Washington Post says that “It is by now well documented that start-up activity has been slowing down in the United States for about three decades, dropping sharply over the past 10 years.” This is a problem for you because start-ups are a central part of America’s economic health – or at least they used to be. Here’s the deal: if we want to stimulate economic health, we need more start-ups, right?
But why are start-ups having such a problem? Could it be a lack of money to try in the first place, too much start-up red tape, and being taxed to death? We could all speculate as to why people decide not to start a business these days, but it doesn’t take an advanced degree to know that the reason surrounds money. Not that it matters, I suppose, but according to Fortune and Forbes, nine out of ten startups will fail anyway, and all the people who try and fail are left holding the bag – which equates to even less money circulating in the economy.
Let’s think about who we would want to start businesses in our communities. We need to think about who would be interested, ambitious enough, motivated enough, and knowledgeable enough to open a new business and give it a real shot. The logical answer is probably the educated, right? Unfortunately, we cannot really turn to them because we are currently trying to smother them. Let’s take a look at this group for a moment.
There are roughly 43.3 million Americans with student loan debt, owing roughly $1.26 trillion in total. The average monthly payment is about $351 a month for debts at or around 25K. This number goes up substantially for those with advanced degrees and bigger debt loads. Something else that should be noted is that the student loan delinquency rate is about 11.6%. This group is having some issues.
I think by far the most important bill in our whole code is that for the diffusion of knowledge among the people. no other sure foundation can be devised for the preservation of freedom, and happiness. – Thomas Jefferson to George Wythe, 13 Aug. 1786
Let’s get logical. Is a smart person going to load themselves up with even more debt trying to create a start-up that has a high chance of failure when they know they are already on the hook for a lot of cash? Probably not. That would be irresponsible. Instead, they play it safe and take a lower-paying job that feels more secure. This equates to less money to spend, lower tax revenue, and so on. We should probably also consider how much less these folks have each month because of what they are spending on their student loan payments. Factor in stagnant wages, inflation, and so on – you got a problem.
I have a 4-Step plan to fix this. It meets the Keynesian imperative and will stimulate economic growth at the same time.
- Part 1 – Require a reduction in taxation on both the citizen and on business in general. Tax the products themselves when consumed and increase tariffs. Consider the Fairtax.
- Part 2 – Eliminate the direct profit mechanism of all student loans. The federal government and/or its affiliates should not be profiting from their people when they are also gaining by having an educated and working society.
- Part 3 – Forgive all government-backed student loans – maybe even private.
This is where many stop and cry “socialism.” I understand that some are not going to like this – at least at first – but hear me out because this would not be socialism per se. This is because (as I have already addressed) the government is not only growing but attempting to make a profit. Regardless of whether we argue that it should be the Fed or the Government that figures out a solution, we know that a solution needs to be had. The question many will ask is, “Why should the taxpayer be on the hook for that?” or “Are we going to buy everyone cars too?” These are good questions and deserve solid answers.
The car situation is only similar to the student loan situation. The total debt from car loans has hit $1.027 trillion as subprime loans increase. USA Today reported that the percentage of subprime borrowers who are 60 or more days behind on their payments has increased by 17 percent since last year alone. In addition, the average car loan has also been increasing and is now up to $29,880, and monthly payments have increased to $499. Some argue that this automotive subprime fiasco is now a bubble waiting to burst. Furthermore, roughly 80% of Americans rely on a car to get to work. What a mess!
So why not bail out auto loans? The simple answer is “Return on Investment.” If you invest in something, you want to get money back plus some. You wouldn’t get that buying everyone’s cars. Additionally, not everyone needs a $30,000 car or truck to get to work. True, if people can’t get to work, they can’t pay their bills. If they can’t pay their bills, the economy is not stimulated. But paying for everyone’s automobiles would not be a good investment opportunity for the government because it would not increase revenue or increase the rate of return for any party involved. Buying cars for people is simply a poor investment because there is nothing gained by doing so and because automobiles depreciate in value. Furthermore, it was ego that bought that high-dollar car, not a necessity or economic pressure.
On the other hand, I would argue that YOU want a highly educated society and that there IS an increased rate of return by paying off a student loan. International studies have proven that increasing the average number of years of schooling attained by the labor force boosts the economy as a whole (when actually learning something and improving cognitive skills). This means that the more educated a society is, the better our economy gets.
(Remember – America ranks second in ignorance and our economy is in the tanks)
Without a college education, you might be able to land a job making roughly 30k a year. A two-year degree might land you a 50k-a-year job. A bachelor’s degree might even land you a 70k-a-year job. And let’s say that Masters lands you a 90k-a-year job. Yes, these will vary, but we are using these as examples.
If everyone graduates high school and gets a basic 30k-a-year job, they will only pay roughly $276,000 in federal income over their 40 years of work. However, the person with the two-year degree stands to create roughly $460,000 in federal revenue over their 40 years of working. The person with a bachelor’s degree is producing some $644,000 in federal revenue over their 40 years of work. The guy with the Master’s education is producing some $828,000 in federal revenue over his 40 years of work. The return on investment is substantial here. This is especially true considering that two-year costs under $20K, a bachelor’s degree costs roughly $40K, and a Master’s degree roughly $60K – give or take. Your rate of return in taxes is substantial. These taxes can be used for all sorts of things – like infrastructure, which is currently rated at a D+, and while the government is trying to figure out how to pay for it – just for example.
“But if you implement the Fairtax, there is no federal income tax to get that return!”
True, but that doesn’t mean our economy still wouldn’t benefit from the start-ups and expanding job market. Even if, by some miracle, the Fairtax did pass, it would still be either a neutral or positive gain in regard to revenue because people with money tend to buy products because they have the money to actually purchase them. Consumption would be up dramatically. Think about what you might do with a reduced debt load, more money each pay period, and cash in hand. It’s not rocket science. The ROI is significant either way. The thing we need to remember is that something like the Fairtax couldn’t be passed near as fast, saving our economy by freeing up the spenders and entrepreneurs.
Or perhaps this brings us to Step 4 – Make education more competitive and affordable in the first place and stop handing out ridiculous degrees like “Social Justice” or “Liberal Arts.” The key is to increase cognitive function and people who can benefit society. Actually, learning something that has a benefit to our society might be handy. Degrees in Phallus, Queer Musicology, Star Trek, Surfing, or Youtube are not exactly generating jobs or advancing our nation’s capabilities.
I know that many will argue that this money would be better used for things like roads or the military. As already stated, I agree that these need some attention, but I would argue that we need to generate the income in order to address these, not continue to borrow or print what we cannot repay. I am aware of and have written about the status of our infrastructure. Again, Bank of America Merrill Lynch recently wrote that the American Society of Civil Engineers (ASCE) gave the US’s infrastructure a ‘GPA’ of ‘D+’ in 2013. They estimate that the US has an investment need of $3.3 trillion between 2016 and 2025 and has planned investments of just $1.8 trillion, which leaves a $1.4 trillion gap. Where is this money going to come from? Where can we generate it without it adding to our national debt? The current plan appears to be raising taxes on people who are already out of money. This just does not seem feasible in the long run to me.
As for the military, that is a completely different beast, and it needs an overhaul. According to a recently recovered Inspector General’s report on the 2015 fiscal year, the Pentagon failed to account for $6.5 trillion in its financial statement. Of course, this doesn’t include the ridiculous amount of waste or the stories about the Pentagon paying for employee’s personal bills – again. My question is, where is all of the concern on this one? $6.5 trillion could have more than paid for the student loan problem, or the VA issues for that matter – perhaps both. So we’ll allow the Pentagon to “disappear” $6.5 trillion for the sake of securing petro, but we will not even consider a fraction of that to save our economy?
If you are going to invest, invest wisely. We seek a boost in both revenue and GDP (possibly even manufacturing). There are studies showing how to accomplish this, but many are simply ignoring this option; while turning their heads when the government spends countless dollars on corporate corruption. That’s just silly.
Some are dead-set on the idea of raising taxes, though. Between February 2009 through July 2016 (President Barack Obama’s tenure), the U.S. Treasury has collected approximately $19,966,110,000,000 in tax revenues, according to the Monthly Treasury Statements. The Treasury only needs to pull in another $33.89 billion in taxes to reach the $20 trillion mark for Obama’s presidency – and we are still somehow running a $534 billion deficit in the fiscal year 2016. Want to increase revenue? Then raise the amount people can make by giving them the education necessary to land a better job and then allow them to keep the money they earn so that they can go out and spend it. When they spend it, collect tax on consumption.
Or maybe I am looking at this wrong. It’s possible, I suppose. I mean, our current program only took a little more than seven months to add half a trillion dollars to the national debt. Only, I have yet to hear about any kind of return on investment there. The way I see it, things are just getting worse. We hear about wasted expenditures to nations like Iran, Israel, or Egypt. We hear about corruption, and I’m hearing experts saying we are getting close to the end of our rope. Meanwhile, the national debt hit $19.5 trillion for the first time not long ago, and the few that do care wonder how we are going to pay it off. Great question!
It has become desperate enough that Douglas W. Elmendorf, dean of the Kennedy School at Harvard, argued in a recent paper written with Louise Sheiner, a senior fellow at the Brookings Institution, that the sensible solution is to spend money now and deal with the debt later. My position is that if it is that bad, and we are going to spend the money now anyway, what do we have to lose by trying it? I am also saying that while we do need to try something, it also needs to at least be thought out.
Think about this: we’ve added half a trillion in about seven months. What’s another $1.3 trillion when we already have almost $20 trillion on the books; trillions wasted or lost by the government who put us here and another $200 plus trillion in unfunded liabilities? Seems to me that we need a way to stimulate economic growth now as well as later. We must increase revenues, increase GDP, create a sustainable and long-term solution by creating a nation filled with people willing to innovate, start businesses, and make better decisions based on better information. This isn’t socialism at all; it’s a wise investment.
The conversation we should have next is about the quality of education, but that’s another article completely. Let’s focus on step one – freeing up the economy by dealing with our student loan crisis. If we are going to allow our money to be wasted in the first place, we might as well waste it trying to do something that might actually work this time.
…preach, my dear Sir, a crusade against ignorance; establish & improve the law for educating the common people. – Thomas Jefferson to George Wythe, 13 Aug. 1786
Clarifications and Explanations
Let me again remind everyone that this is a compound problem and requires a compound solution. It’s not as simple as “pay off the student loan debt.” Let me also remind everyone about the importance of having a well-educated public for the preservation of liberty and our democratic processes. This is partially why grade school and high school are set up the way they are. And for clarity, let me remind everyone about the outcome of the current system; low and middle-income families with mountains of debt and a prison system that encourages corruption along with the highest incarceration rate in the world. This wasn’t always the case.
Starting in 1825 and spanning until the 1960s, state universities were “tuition-free.” This was the standard. So from the time of our founders until fairly recently, our nation did it right. Think about it like this: during that time, we became THE world super-power. Consider what I have written thus far, and it’s not hard to see why. Yet, not everyone went to college because it was not entirely necessary for everyone to go. The same holds true today. Back then, jobs were plentiful, and there were options – that’s the part that has changed.
It wasn’t until government policies began to destroy business and manufacturing that people started getting the idea that they had to go to college to be more competitive. Then the cost of education started to skyrocket. And it wasn’t until we began to expand the government to a crazy degree that the government decided it needed to profit from its citizens! It’s simple; social and legislative changes turned higher education into a business to the point that even the government makes money on the deal. In fact, according to Bloomberg, college tuition and fees have increased by 1,120 percent since records began in 1978, and the government makes BILLIONS off student loans.
Think about this. Colleges are not federal, and until about 2012, states paid at least 65% of the costs anyway. So why all the federal involvement? There is a profit element that people need to wrap their minds around. I understand that this is difficult because the propaganda surrounding this topic has been HIGHLY effective.
So what happened in the ’60s; what changed? We need to start with California Governor (liberal turned conservative) Ronald Reagan’s war against the anti-war protesters at UC Berkeley and the “War On Drugs”. As I mentioned earlier, we now incarcerate more people than any other nation on the planet. Well, this is what I am talking about, and this is really when it started. This “War On Drugs” resulted in a massive number of prisons and a massive government. The shift in dollars from education to government expanded the size of government, increased ridiculous laws, and ultimately dumbed down the nation. In California alone, the prison population increased 500 percent between 1982 and 2000, according to historian Ruth Wilson Gilmore in her book Golden Gulag. It’s getting worse, and it’s easy to see if you just follow the money.
The point is that if we could begin to move back toward what our Founders intended, we would be stronger, wiser, freer, and richer. But this would require ending the “War On Drugs,” reducing the size of government substantially, following a more Constitutional rule of law, and allowing Main Street to thrive. It would also require allowing students to attend college without someone trying to profit off of them for doing so, just like in grade school or high school.
Let me also make something very clear. While public state universities were tuition-free, they still charged fees. College has never been “free” in the US, per se, and I don’t necessarily advocate that it be. I’m saying that we need to make college another step in the educational ladder that can be taken by those who want it, like grade school and high school. There have always been fees for non-instruction costs like housing, healthcare, infrastructure, and technology. Education is what is needed. The other stuff is a luxury and should be addressed as such.
This brings us to Ivy League schools and for-profit private schools. I will remind everyone that even Ivy Leagues offered a tuition-free model for many years as well. In fact, some still do – but they still charged fees, and those fees are varied. Regardless, a free (or even sliding scale) state college tuition model would create a price competition for those “for-profit” colleges. This would result in reduced tuition costs overall as they attempt to remain competitive and draw quality candidates. It may also increase scholarship opportunities.
Understand that returning to the intended system under what I proposed would NOT increase your taxes. In fact, it would probably reduce them and eventually land you a better job, a stronger currency, cheaper prices at the store, and a substantial amount of renewed liberties. This would be especially true if we ended this “War on Drugs,” which I believe should be a part of this plan. And whether we continued with the unconstitutional income tax or switched to something a lot more logical like the Fairtax, the tax burden would actually be reduced due to the vast economic boost and reduced size of government. Businesses would be opening, people with money would be spending while the government enjoyed a larger pool of citizens to take from. This creates a surplus. Heck, we might even be able to pay off the debt.
Regardless, step one is getting rid of the “debt” bubble that is probably going to burst and drag everyone along with it. Our government is being asked to spend the money anyway, and the other things we have tried thus far haven’t worked. Why not try something that would get us closer to what our Founders intended and give us the economic boost we need at the same time? Why not try something that clearly stands to benefit our nation as a whole instead of repeating the mistake of giving money to bankers who only get richer?
Would you be interested to see how some tuition-free schools operate today? Learn more by clicking here.
If you are interested in continuing this discussion, I will encourage you to read my article titled “Student Loans: What Did We Think Would Happen?“