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Forgiving Student Loans: A Stimulus Measure to Revitalize the Middle Class

Presidio Economics | Monday October 17th, 2011 | 15 Comments


3p is proud to partner with the Presidio Graduate School’s Macroeconomics course on a blogging series about “the economics of sustainability.” This post is part of that series. To follow along, please click here.

Student Loans are bad

SOURCE: http://wearethe99percent.tumblr.com

By Tommaso Nicholas Boggia

How would your life change if, all of a sudden, you no longer had to re-pay your student loan debt? What would you do with that extra $250-$1,000 of your paycheck every single month? If Congressman Hansen Clarke (D-MI) has his way, this question might not be rhetorical anymore. Student loan debt forgiveness could be the stimulus measure that breaks us free of this long recession.

Millennials are being strangled by record high student loan payments, more than any previous generation due to the skyrocketing costs of higher education, high unemployment, and stagnant wages. A whole generation is seeing their plans and ambitions shackled by the extra weight of their student loan payments. These young people are unable to buy a home, start a family, or do the socially important but underpaid jobs in the social services sector where many recent grads cut their teeth.

Congressman’s Clarke resolution, H.R. 365, aims to redirect the attention of government officials from reducing the federal deficit to addressing the real crisis facing millions of Americans and perpetuating this recession: the unrelenting financial drain on the economy caused by record levels of household debt. H.R. 365 also deals with home mortgage and personal debt, but as a Millennial the part I am most interested in is his proposal to forgive student loans.

Acting on this resolution would provide a trillion dollar stimulus to the demographic most sought after by advertisers and by realtors: college educated young people. These are the people that have the potential to revitalize the housing market and local economies. Best of all, this wouldn’t just be a short-term money injection; this resolution would result in millions of people being able to keep more than 13% of their paycheck every month for 30+ years (assuming Stafford loan interest rates and using average millennial debt and wage).

Now, any measure that specifically targets student loans, mortgage rates, and other forms of personal debt carries some inherent social justice issues. This measure would do little to directly help the poor.

On the other hand, eliminating student loan debt and helping people lower their home mortgages are investments that revitalize the middle class. This country used to take immense pride in its strong middle class, but it hasn’t promoted its growth for the past thirty years. When the American Dream was still achievable, a poor household could aim to achieve middle class status, but recent trends are showing just the opposite. Regardless of work ethic, more and more middle class families are slipping into poverty, in part because of the heavy debt burden of house ownership and of pursuing a higher education degree. For the first time since the Great Depression, today’s Americans are not likely to have a better standard of living than their parents.

Another criticism rests on the assumption that if current debt is forgiven, it would discourage future borrowers from paying theirs back. This argument points at the real crisis in higher education. The problem isn’t simply that people have too much debt, but that by choosing to enroll in an institution of higher learning to hone their skills and become a more productive member of society, they are essentially forced to. This is a financial burden that used to be largely taken on by the government (and still is in most other modern democracies) because it was recognized that the road to social and economic growth was rooted in an educated citizenry. Thus, while this criticism has some validity, it simply stands to underscore the need to reform our systems of financing public higher education altogether so people no longer have to take on such high debt burdens.

By injecting a trillion dollars directly in the bank accounts of college graduates, forgiving student loan debt will enable them to finally put their education to a good use and get their adult lives off the ground. Will this measure alone be enough to revitalize our ailing economy? Perhaps not, but I still haven’t found a valid argument as to why it should not be a major component of a recovery package.

Tommaso Nicholas Boggia is an MPA candidate at Presidio Graduate School. He is a passionate advocate for strengthening the middle class as an essential element to building a sustainable society. He can be reached at tboggia@gmail.com

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▼▼▼      15 Comments     ▼▼▼

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  • Ian Thomson

    I’m not sure how I feel about this. I’ve taken on all the debt I’ve accrued very seriously. The moral hazard that this presents should be avoided, particularly because this presents even less stress for the for profit education machine that is further eroding the value of a bachelor’s degree.

    • Tommaso Nicholas Boggia

      Thanks for your comment Ian! I have similar concerns, that’s why I said that forgiving student loans must be part of a restructuring of higher education to make it both less expensive and more rigorous.

      • Eugene

        I see both sides of the argument why debt should and shouln’t be forgiven. On one side, forgiving it would give people an entitlement that they don’t have to repay debts. On the other hand, the debt is reflective of the ridiculously inflated cost of education, which isn’t anymore of great quality as it is advertised. Looking at what the banks and their minions can do to a borrower if they don’t pay, which includes running them financially dry to a bone, why not make those responsible to a great degree share the pain. I mean the schools themselves. They took 99% of that money in and it wasn’t spent on improving education. Make them share the pain. The obvious truth is that universities aren’t shy about making students pay for their financial troubles. Why not give them a taste of their own medicine. Sure some might say that would drive them into bankrupcy, but maybe they deserve it. To me it is the schools that should receive close unfavorable attention.

  • Jamie Newman

    These kids are leaving college with nearly 30K or more in debt. We bailed out the banks that were too big to fail but we are doing nothing to help these young people who’s only mistake was believing that an education is the right thing to do. WE told them it’s good debt. That’s a lie, it is not good debt. WE told them to get an education, it will help you in life. Most who graduate today, I think the number is 85%, have to move back home with their parents because they cannot find jobs. This very well could be the next bubble and when this one goes it will be much worse than the housing bubble.

    • Tommaso Nicholas Boggia

      This is, I believe, the core issue. The higher education bubble has grown out of the continued assumption that any degree is worth the debt incurred to achieve it. This is increasingly not true, especially with degrees from certain for-profit institutions (**cough** University of Phoenix **cough**). Fun thing is, I say this as a current grad student getting into debt for a degree I am not sure will earn me a significantly higher paycheck given that I’m probably going to end up at a cash-strapped non-profit.

  • Nick Aster

    I definitely have mixed feelings on this one too. Maybe forgiving *some* student loans for *some* types of programs would be wiser, but there is also a certain need for responsibility in terms of what types of education were chosen and so on … I’d also like to see the cost of education come down to begin with – making loans less necessary in the first place.

    • Tommaso Nicholas Boggia

      Agree on the second part of your comment. As for the first one, the bubble aspect of higher education implies a lack of ‘perfect information’ on behalf of consumers. A core point that I tried to implicitly make in my post is that big banks and auto companies were bailed for their mistakes, while the middle class continues to get punished for theirs. It’s about time to bail out the middle class, not continue punishing them for things that were not entirely in their control.

      • Alison Monahan

        I’m not sure canceling all current student loans is the right option, but I think this is a discussion that needs to happen with some changes ultimately being made. Maybe it’s refinancing to lower rates (even government loan rates are quite high, thanks to GWB who changed the rules so you can’t refinance at a lower interest rate the way you could a few years back), or cutting principle balances above a certain level, whatever. It’s a real problem for a lot of people who “played by the rules,” and thought they were improving their lot in life, only to find there were no jobs in what they’d trained to do.

        Also an education/awareness issue, for sure. On that note: http://thegirlsguidetolawschool.com/09/law-school-myth-2-student-loan-debt-is-good-debt/. Send it to any prelaw you know, and make them read it!

  • Dr. J

    Let’s all support student loan forgiveness for three reasons:
    .
    [1] The scale of student debt in this country will drag down the economy for a generation, which is a bad thing for everybody, ultimately even including the banks.
    .
    [2] Student loan debt most impacts working class students and first-generation college students, which is classist, immoral and unfair. It has been likened to a modern form of indentured servitude, because the working class student is promised access to a new and better life in the middle class but, upon arrival on those shores, must submit to a decades-long period of servitude to the master who paid the way.
    .
    [3] Tuition has increased far faster and far higher than nearly anything else. Meanwhile, the real value of a college degree has declined. The implication is that our generation has been ripped off.
    .
    I hope that this bill becomes law, and that the moral wisdom of liberation for our generation prevails.
    .
    I also hope that widespread “repayment disobedience” is not needed to dramatize the moral clarity of the proposed initiative.
    .
    One possibility is to form bank-specific “student debtor’s unions” that will have the people power to favorably renegotiate student loans. The power of such a union would derive from their stated and deeply felt commitment to refuse repayment as a group –a loan repayment strike –in the absence of a more equitable agreement than that the presently exists unchallenged.
    .

    • Rich

      Where is the outrage against these schools that portray themselves as “nice and friendly” when indeed they are money making machines?
      Where are the protestors taking over Admin buildings and demanding smaller classrooms, professors actually teaching instead of TA’s?
      Where are the protestors complaining that schools will WASTE millions of dollars on football programs while cutting the very programs that they were founded on and for?
      Where is the schools accountability to their students and alumni?

      Oppositions to the Bill

      Will this bill really solve our problems? I don’t think it will. What we need is a real base for employment and growth. If student loans are forgiven, it will “in theory” put more money in your pocket…yes, 200-500 per month that would be used on consumer goods that are produced in Asia and will lead to the continued consumerism that has gotten us into this mess.

      In addition, the bill proposes more than just student loans, it proposed all consumer credit : credit cards, mortgage , auto etc.. Is that right? Think about it?
      Do you need that Louie Viton Bag? Those Gucci glasses? Thos Jimmy Chew shoes? That NEW 2012 Camaro instead of the 8 y/o Toyota corolla that you are driving? That 55inch Flatscreen? Those $200 pair of Nikes? That trip to Mexico or Vegas? Hey, whats wrong with renting? Should you be able to stay in your house collecting a check while I great people at Walmart and stock shelves at the local grocery store at night?

      I am adamant that debt forgiveness is wrong. No one put a gun to any of our heads for our credit cards, cars, homes or student loans. I, like you, took a chance and went into serious debt to fund my education. I like you have struggled to find employment and caught the front end of this recession (long before most everyone else realized we were in one). I am not happy with the what I have been forced to do (move, -be in a place where I don’t want to be, be doing what I don’t want to do, struggling to make ends meet) but when as Americans has pride taken over our ability to get the job done? When have we started to look for others to bail us out instead of finding a way to get it done?

      I am a fan of devising a way to make it more affordable in the long run so that students will NOT be crippled with this debt for their repayment period of 10 years 9or 20 with a consolidation loan). Here are a couple of thoughts:

      What about a true subsidized loan from the government where you can pay your loans over 30 years at a rate of 3% over the cost of 30 year Treasury?
      What about committing the government to supporting AmeriCorps and other domestic programs that allow former students to gain some valuable experience for a couple of years in exchange for a reduced wage that results in a reduction of their loan balance’s?
      What about compulsory military service so we can wipe this sense of privilege off the face and out of the psyche of US kids and adults?

  • Tom

    Aaah – Rich:
    You make sense.
    Personal responsibility. Something often missing with the Millenials. Want less expensive college? Stay away from expensive schools. If enrollments dropped, the tuition would fall also – simple supply and demand. For the record, college isn’t for everyone and, as a society, we can’t expect to educate everyone. Who’s going to fulfill basic labor jobs? Someone with an MBA? If you decided to go into debt for your education, you should be responsible to pay for it. My wife paid for her own college, attended school full time and worked full time – and accumulated zero debt. But that’s hard work! We paid for our kids’ college and now have about $100,000 in student loans. Why should your debt be forgiven and not mine? The government has been guaranteeing the loans – and now they’re getting the middlemen out of the way. Good start. Low interest rates, extended terms – all for it. Forgiveness – I’ll opt for personal responsibility. You borrowed it and you decided where to attend. I can’t be responsible if you elected to major in history instead of math. Cowboy up and get to work. You may not get your ideal job right out of the gate, but with hard work, ethics and a little luck, you’ll do fine. Thanks!

  • Adam Emerson

    Mixed emotions about taxpayers picking up my school tab, but I do believe that the system needs to be fixed. What about the next generation? We were sold the new form of Subprime Mortgage: Student Debt. We paid top dollar for a good, and now that the bottom has fallen out of the market we are stuck with something that is worth less than what we paid for it and doesn’t even have material value. At least with a home you own a house. Diplomas don’t wash dishes or keep rain off our heads.

  • Bill Peterson

    Forgive the loans and charge a penalty fee of 10% of the balance that could be payable over 10 years. The penalty still carries with it the responsibility of meeting the debt, but frees up the other 90% to be spent on living expenses and invested toward retirement.

  • http://pulse.yahoo.com/_HMWJFO334E2STMDP5OEDM3IMZQ Back to Basics

    Like many of you, I can see both sides of the argument.  Not everyone’s inability to pay has to do with not being able to find a job – many recent University grads are simply trying to live a life they can not afford, because they think they deserve it after 4 or more years of University.  I saw way too many of my University friends graduate, get a job and then sign up for a ton of additional debt before their grace periods expired and they had to start paying on their loans.  It was also very common for student to qualify for more than they needed, and to take all the money, because, well why not. Not to mention, I knew a lot of people in College that were not serious students.  They were they for the social life and I find it really hard to stomach the idea that the tax payers should pick up their financial burden.
     Right now, we are in a strange time, we people do not seem to understand that everything in life is a trade off:  if you put all of your time and energy into A, you can not put it into B – or if you take out loans today, you will have to forgo the money tomorrow.  The more the government and society shelters people from the consequences of their decisions, the more difficult it is going to be for people to learn these lessons in the future.Also, if people are unhappy with their education, why are they not contacting their former institutions and complaining.  Recent alumni along with current and future students all putting pressure on Universities to lower cost would be a really good thing.  In the end, the growing student debt problem is being caused by the grossly increasing rates of tuition.  To truly solve this problem, Universities have to be reformed or restructured to lower costs.  In the end, if something is going to be done, I would much rather see the interest forgiven, but leave the principle or do something like Australia where you do not pay until your earning surpass a certain amount.  

  • http://britainloans.co.uk/ Britain Loans

    If it’s too much debt, stop it.  Forget about college until you can earn enough to pay for it or seek a career elsewhere.  Work with your hands.  Stop whining.  You knew you were borrowing it.  Why didn’t you think about how hard it would be to pay back when you borrowed it?  Why should anyone else have to pay your debts for you just because you wanted to study some subject that doesn’t produce enough income to pay your loan?  Did you go to a community college first to get your required courses?  Did you  live at home while you went to college to hold down costs?  Did you work during college and double up on work during the summer?  I did.  I didn’t have any student dept when I graduated.  It was HARD as hell but I did it.