On the Need for the Complete Cancellation of Student Debt in the United States
The United States student debt stands at a whopping $1.5 trillion, about 11% of the entire national debt. (see first graph) Debt, by itself, is not necessarily bad even in large absolute amounts. It is the lifeblood of the modern economy, since a complex economy needs a dynamic and thriving interplay between those who have money (creditors) and those who do not (debtors).
What is worrying and cause for extreme concern is the large number of Americans who cannot afford their debt (see second graph). Just over 10% of all student debt is delinquent for more than ninety days—about $150 billion . This means that the holders of such debt have not made their debt payments in over three months i.e. these people have, for all intents and purposes, defaulted on their unaffordable debt.
Student loans mainly affect the millennial generation, but it by no means excludes those well past their student days. Nearly 40% of all debt accrued by 18–29 year olds is concentrated in student debt. But as the above graph demonstrates, there are significant percentages of student debt still held by those even in their 60s, not having been able to pay off the debt over the course of a lifetime. Debt once taken on can claw its way around the neck of debtors, haunting them like the stalking albatross of Coleridge’s Rime of the Ancient Mariner.
The proposal to eliminate all student debt might come across as radical at face value and may present several counterarguments. “Who will pay for it?” “It is unaffordable.” “This creates moral hazard.” “Debtors should suffer for their irresponsible borrowing.” Before dealing with these valid but ultimately incorrect criticisms, it is necessary to explain what debt cancellation would look like and to justify its ground.
I will work according to Bernie Sander’s proposed plan for debt cancellation, inspired by “ The Macroeconomic Effects of Student Debt Cancellation” (Scott Fullwiler, Stephanie Kelton, Catherine Ruetschlin, and Marshall Steinbaum 2018). Debt Cancellation would mean the Federal government would forgive all the debt it currently owns and buy out all privately owned debt: “ In a government financed cancellation program, the current loan portfolio of the Department of Education is cancelled and the federal government either purchases and cancels or takes over the payments for privately owned loans.” Since much of the Department of Education’s loans are already delinquent the new costs would only amount to forgoing the interest payments.
Debt forgiveness is by no means unprecedented. Ancient as well as modern history is replete with examples of debt forgiveness of all sorts. King Hammurabi of Mesopotamia forgave the odious private debt of his citizens, an act recorded on the stone etchings of Hammurabi’s Code, when the burden became unbearable, and threatened the social and political order. The International Monetary Fund (IMF) starting in 1996, offered extensive debt relief to African countries who could not afford their national debts. Bankruptcy courts today write-off odious and unaffordable debt to reconcile the bankrupt. We see that, in principle, debt forgiveness is accepted, even if the exact extent of such debt relief is left to debate.
Why should we then, you might justifiably ask, eliminate all student debt? There are compelling economic, moral and social reasons for doing so. Research shows that the elimination of all student debt would be equivalent to a stimulus. Eliminating debt payments would radically increase household spending and investment. More jobs would be created as a result of the boost to consumer spending and investment. Lower unemployment produces higher taxes and therefore more revenue for the government. The housing market would improve because of increased demand.
Morally a college education should be a basic human right and not conditional on your income. We, as a society, particularly a rich one, should not yoke a significant part of the population into debt slavery when we can afford to do otherwise. The stress, anxiety and depression caused by the Damocles sword of lifetime debt bondage is a tangible harm to human flourishing. This is self-evident when it comes to health, but it is even more pernicious when we consider the true delights of being alive. The human spirit cannot be creative, imaginative or free when constant stress weighs it down. Attaining an education should never be mutually exclusive with fostering freedom and personal autonomy. Unfortunately that is the case in the United States.
Student debt is disruptive to the lives of those heavily indebted. Debt payments drain money from debtors when that money could be spent towards investing in a home, starting a family or general personal pursuits. Instead of a lifetime of debt repayments, cancelling the debt would allow a new generation of students to invest in home ownership instead of perennial rent payments.
So far I have proceeded on the assumption that debt cancellation would result in an economic stimulus, producing a net positive in GDP. But even if we accept the counterclaim that it would cost more than it would produce, we should still accept the costs as a worthy endeavor: one that, like the calculation most families now have to make, but on unfavorable and individual terms, certain unaffordables should be taken up at the cost of a deficit, or a debt. A nation that chooses not to educate its citizens because it is unprofitable is an irresponsible nation. The state can, like Hercules, hold the world. The individual, however, breaks his back.
Furthermore, there are easy mechanisms for eliminating or mitigating any deficit from educational spending. Cut military costs. The US military accounts for 61% of all discretionary spending. Diverting money from the military would easily account for any fiscal deficits produced from even a mild increase to the educational budget necessary for debt forgiveness.
It is necessary to note that Bernie Sanders proposal is actually quite modest and reasonable when we consider truly radical ideas. His plan would not affect the private market other than compensating them from federal coffers rather than from individual American’s wallets. This is also not a unilateral revocation of property rights on behalf of debtors like the jubilees of Biblical times. If there were such a thing as cosmic economic karma, it would be just and right, (and satisfying) if Bernie, like King Hammurabi before him, imposed the costs of debt cancellation onto usurious creditors profiting from educational debt. It is still a wonder, if not a mystery, of the early 21st century that the banks of the United States were saved by the federal government with almost no consequences for creditors! Instead the countless millions facing foreclosure, bankruptcy and over-indebtedness were subjected to humiliating and unrelenting hounding from banks and the authorities. The debtors were blamed as irresponsible as if they conducted a transaction with themselves, instead of an equally guilty and greedy creditor.
Our intuitions around debt are deeply ingrained to favor the creditor over the debtor. This, however, is wrong in certain circumstances. Ask any man on the street and he will say that if a debtor has taken money from another, he is under the obligation and moral right to pay back the money, come hell or high water. In general terms, the man on the street is correct. The universal breakdown of trust in mutual agreements would tear society apart, and would block the source of finance at its spring. Not to mention the implicit notion of theft in an unfaithful transaction.
But exceptions must be made in exceptional circumstances. Often a bona fide deal between creditor and debtor is intrinsically wrong from the debtor’s perspective. This can happen for two reasons.
In the first instance the credit market is distorted, and the value of the asset purchased on loan far exceeds the asset’s real value. This is unfair because during times of credit bubbles an inflated asset has far more potential to ruin an individual debtor than it does an institutional creditor—i.e. the debtor unduly carries far more risk than the creditor. Imagine a debtor borrows $60,000 for his education but because of the failing employment market, he is now unemployed. Now the man has no means to pay off his debt. He is, however, blameless because receiving the education was objectively the right thing to do but circumstantially and unforeseeably the wrong thing to do. The creditor institution is more culpable ( I am not exonerating debtors) because it ultimately causes the macro-credit bubble due to banking policies whereas each individual debtor bears partial blame. If the bank allowed NINJA loans in 2008 (loans to non-creditworthy debtors) it bears the guilt of inflating the credit market, and for causing a systemic collapse eventually. The moneyless individual debtor can be blamed for his temporary greed and speculative gamble, but he is a helpless cog at the will and whim of market forces beyond his control, but decidedly in the hands of banking institutions.
The second reason for a flawed bona fide transaction between creditor and debtor is if the asset in question is a basic necessity borrowed by non-speculator debtors. The nature of such a transaction is inherently coercive since the moneyless debtor is forced, due to external pressures, and not his own volition to own a certain asset. Such is the nature of education in the modern world. While a shrewd reader might contest this on the grounds that, in the specific case of education, the asset has sufficient return on investment, this ignores the inevitable fact that a certain percentage of people will become delinquent and not be able to afford an asset which is definitionally a necessity. This makes more concrete sense when we apply this concept to mortgages, but still makes enough sense if we consider an over-indebted graduate as squandering his educational asset. The solution is to make the delivery of basic, economic rights the responsibility of government and not the private sector. Bernie is on the right path when he says that public education should be free for all and debt-free. It would be more equitable if it were free below a certain income-bracket and scaled appropriately for the wealthy.
Once you realize that the problem with debt is not economic but moral and legal, the question of what to do with that debt becomes clearer. We can choose to ignore it ,and condemn millions to virtual debt slavery. We can choose to blame the slaves for their own slavery as creditors and authorities would like us to believe. Or we can take a stand and say no more. It is time to swing the pendulum from the outdated, elitist obsession with the property rights of creditors in favour of the overwhelming majority of American debtors. And especially the blameless youth.
Student debt is odious and must be wiped clean off the slate. I do not want to see my generation of peers enslaved to an amoral, hypocritical machine of unfair financial obligations. Do you?