Sep
20
2011

My Long Overdue Response to Mark Kantrowitz

Today, the Wall Street Journal called attention to one of the worst economic analyses ever conducted on any topic - the"Freakonomics" analysis of the proposal to forgive student loan debt as a means of economic stimulus.  Utterly devoid of accurate facts and data, Australian economist Justin Wolfers dismissed the proposal as the "worst idea ever."  (Really?  The worst idea ever?  Worse than the Holocaust?  The Edsel?  New Coke?  Jersey Shore? Let's put things in perspective, people!)

In the comments section of the WSJ article, Mark Kantrowitz, publisher of FinAid and FastWeb, re-posted an analysis he conducted of the proposal back in 2009.  Because I'm not an economist (nor have I ever claimed to be), I never issued a formal response to Mr. Kantrowitz's analysis.  In hindsight, that was a mistake.  It wasn't his math that I took issue with, but rather,  the fact that his analysis was limited solely to the mathematics of the proposal.

Fast forward to this afternoon and my seeing Mr. Kantrowitz's comments wherein he linked to his 2009 article, I decided that now was as good a time as any to finally address his concerns.  It's two years late, but better late than never.

* * *

I am, of course, aware of your thoughts on the matter and, as you know, I disagree with your analysis because I believe you fail to take into account how full, across-the-board student loan forgiveness would spur an increase in consumer spending - even for those who are not currently in repayment.

Your analysis assumes that only those in repayment would increase their spending habits if their loans were forgiven, however, that assumption rests on another assumption that people not currently in repayment, for whatever reason, wouldn't be willing to engage in additional economic activity, knowing that their educational debts are no longer hanging over their heads. Elimination of such debt would undoubtedly expand their credit capacity, allowing them to purchase goods and services from ailing sectors of the economy that they would otherwise not be able to buy.  For example, I can envision a scenario whereby someone who's not currently in repayment has his or her loans forgiven and, as such, feels free enough to purchase a home - something they wouldn't ever consider doing while carrying a mortgage-sized debt which they can neither live in, nor even necessarily use, given today's job market.

Then there are the intangible effects of student loan forgiveness that simply are not and cannot be accounted for using your narrowly focused methods.  Currently, millions of Americans are struggling under the weight of student loan debt and, for obvious reasons, resentment, disillusionment, and hopelessness have been building and will eventually reach a tipping point.  This plan has the potential to stave off the inevitable results of the student loan bubble's impending burst and would also serve as a positive indication that our government truly values a well-educated middle class.  Politicians are always touting education as the silver bullet for solving all of society's ills, yet they refuse to put their money where their mouths are. 

A well-intentioned program designed to give access to higher education to those who could not otherwise afford to go to college has had the unintended effect of causing tuition rates to soar.  Since 1982, average college tuition has increased by 439% - more than the rate of inflation and even more than the increase in healthcare costs.  Thus, while it may still be true that, on average, a college graduate earns more over his or her lifetime than those without a college degree, nobody ever seems to take the next logical step and deduct the educational debts from those higher earnings to give a more accurate picture of the reality facing those with student loan debt once they're out of school.

The proposal to forgive student loan debt as a means of economic stimulus differs from all other attempts at economic stimulus that have been tried and failed before.  Instead of a one-time $400 tax rebate check or $1500 of additional yearly income through a payroll tax deduction,  this plan would provide a constant infusion of cash into the economy for 20-30 years.  Student loan borrowers currently in repayment would have hundreds and, in some cases, thousands of extra dollars in their pockets each and every month with which to spend in the economy, while those not currently in repayment would be psychologically freed up to spend more - none of that is accounted for in your analysis.

Further, you assume that student loan forgiveness would cost taxpayers the full amount of today's total outstanding student loan debt balance (which, for the sake of accuracy, has increased by nearly a quarter of a TRILLION dollars since you wrote that piece, with no signs of it abating).  In light of TARP, the bank bailouts and the $16 TRILLION in secret, no-interest loans from the Fed to the very institutions that brought our economy to the brink of collapse over the last few years, I believe the lenders owe the taxpayers something in return.  As such, any legislation to implement this plan can and should give the government the power to renegotiate the amounts owed, eliminating much of the usurious capitalized interest accrued, as well as the exorbitant fees and obscene penalties that the lenders, guarantee agencies and collections agencies have been allowed to charge with little to no regulation or oversight.

Thus, rather than characterizing the plan as one that "would involve the government spending $730 billion now in order to increase consumer spending by $28 billion," a better way to characterize it would be "giving the government the power to renegotiate and lower the balances owed on all outstanding student loan debt, then investing taxpayer money in educated Americans to provide for a sustained economic stimulus over the next couple of decades."

In the two and a half years I've been working on this issue, I've heard from countless people from all over the country who did absolutely nothing wrong, other than to borrow money to pay for an education that no longer has the same value as it once did.  The vast majority of the people I hear from want to pay back what they borrowed - what they don't want to do is to pay back 3, 4, or 5 times the amounts they've borrowed, with absolutely no legal recourse for them to challenge or renegotiate the amounts owed. 

As you know, student loans are exempt from Bankruptcy protections and, as such, a very important check on the power of the lenders has been removed, stacking the decks against student borrowers.  There is absolutely no incentive for them to make wise lending decisions because they know that the borrower cannot discharge the debt in bankruptcy, there is no statute of limitations on the debt, and, in terms of Federal loans, they're guaranteed by the U.S. Government. 

Congress has carved out these special protections for the student lending industry because politicians like John Boehner have, for years, collected  campaign cash by the bucket load from the lenders (and, as further proof that the entire student lending system is a racket, Sallie Mae gave Boehner's daughter a job at their collections subsidiary in exchange for his work on stripping away consumer protections from private student loans in 2005). 

These actions have only served to drive tuition costs into the stratosphere and to indenture student loan borrowers to their educational debts for life.  That is not the way a civilized society should treat its citizens and it makes very little sense in public policy terms to treat student loan debt differently than any other type of consumer debt. Stripping away the statute of limitations on the collection of student loan debt has put student loan borrowers in the same category as murderers.  Stripping away bankruptcy protections from student loans means that, while someone can have their gambling debts discharged in bankruptcy, their student loans are with them for life, and sometimes, beyond.

Thus, while I appreciate your contribution to the discussion, I find it severely lacking, somewhat misleading, and now, outdated, due to the passage of time and the dramatic rise in student loan debt.


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