The U.S. federal student loan system has failed. Catastrophically.
There are 44 million federal student loan borrowers in the country carrying about $1.5 Trillion in federal student loan debt. According to Education Secretary Betsy DeVos last year, 75% of these people were either unable to make payments on their loans, or were paying, but their balances were going up. Trump appointee Wayne Johnson, who ran the federal lending system until recently, said that this was closer to 80% just before COVID-19 hit. Also, we now know that the class of 2004 are defaulting on their loans 40% of the time, but they were only borrowing a third of what is being borrowed today.
We are looking at a default rate of 75% or higher for more recent borrowers. That is about four times higher than the default rate of sub-prime home mortgage loans. By every reasonable metric, this was a catastrophically failed lending system even before the pandemic.
A majority of these 44 million, largely distressed borrowers identify as being politically independent or republican. More than 40% never graduated. All of them are losing sleep over their student loans, and they span the political spectrum. Interestingly, traditionally “red states” are being hurt significantly worse by these loans than “blue states”. This is the largest emerging frontier of American politics today.
This is a big-government, nationally threatening, and now failed lending system that no true conservative should support. The Department of Education, if it were a private bank, would be the largest bank on earth.
Despite President Lyndon Johnson declaring that these loans would be “free of interest” when he signed the Higher Education Act into law in 1965, $100 billion in interest alone is now sucked out of the economy every year, and fed into the government, which was booking over $50 billion in annual profits as far back as 2012. These profits have surely increased since then, and President Trump was decrying this fact even before he decided to run for public office.
Some of these government profits are used to subsidize Obamacare. But what is probably most disturbing: in the absence of constitutionally enshrined bankruptcy protections, statutes of limitations, and other bedrock consumer protections that exist for all other loans, White House Budget data going back decades show that the government has- astonishingly- managed to make a profit, even, on defaulted loans- a claim that no other lender can make.
The colleges, who take in about $100 billion annually in student loan revenue, have been the chief beneficiaries of this lending scam. These loans have allowed them to hyper-inflate their price of attendance, spoil the students with extravagant, unnecessary excesses like lazy rivers, 4-star dining, climbing rock walls, and the like. Not to mention the exploding administrative salaries and never-ending capital projects on campuses everywhere (notice all the construction cranes at the college in your town?).
The greatest outrage: roughly since the last financial crisis, the colleges have begun stockpiling slush-funds (University of Virginia Rector Helen Dragas’ words, not mine)- completely separate from their endowments -of obscene proportions. We are talking hundreds of billions, here, cumulatively.
The President can, without needing congressional approval or appropriation, cancel these federal loans with the stroke of his pen. This could be done without spending one dime of tax money, or adding even one penny to the national debt. During this pandemic where we are throwing trillions at the economy- much of it in the form of loans that don’t have to be repaid- there simply is no cheaper, more expedient, or a better-targeted way to stimulate the economy.
Analysts have predicted that canceling student loans will increase GDP by about $100 billion for the next ten years, but they do not take into account the borrowing capacity (and thus spending) that such a move would free up. This would be another $1 Trillion injected into the economy in the near and medium-term. Some experts even believe that debt cancellation is the only way to avoid a depression.
Rest assured, the taxpayers will be fine. The federal government has been profiting wildly on these loans for many years, and decades of White House Budget data show that the Department of Education has even been making a profit on defaulted loans! While no one- not even the Department of Education- can say with certainty how much of the outstanding $1.6 Trillion in federal loans is original principal, it is likely a small fraction of the balance- probably less than a third. So on balance, the true cost to the taxpayer when the loans are canceled will be minimal and could be covered (at least in part) by the funds stashed away by the colleges over the past decade.
This is long overdue. The lending system is vanishing into a mist of illegitimacy as we speak. The President- whether Trump or Biden- will have to take this lending system to the bath, and drown it in the tub.
The so-called conservatives making false statements that canceling the loans isn’t fair, is not needed, won’t stimulate the economy, and even that the President cannot cancel the loans should be ashamed of themselves. Their outrageous claims and divisive rhetoric only serves to perpetuate the worst big-government lending scam in history, and enrich the very colleges that they claim to oppose.
This post was originally published on Medium.
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