A Jubilee for Me and for Thee

Let's discuss Student Debt Forgiveness, shall we?

Twitter has been buzzing over the potential of forgiving student loan debt. Passionate arguments both for, and against the proposal. What I would like to do here is (briefly) lay out historical precedent for debt jubilees, explain the shortcomings with a student loan debt forgiveness program, and present an alternative.

“What has Happened Before will Happen Again”

Debt Jubilees have a long tradition. King Hammurabi of Babylon. Mosaic Law. The New Testament continues this alongside its denunciations of Usury. More recently, the debt write-offs during the Great Depression and in the aftermath of WW2 helped European companies recover from the economic and material devastation they suffered.

There is nothing new about debt jubilees. They have occurred under economic systems as varied as “absolutism” (idk what else to call 1000 BC economies), feudalism, capitalism, etc. There is no reason to oppose them for being “radical” or “untested”. To do so is to demonstrate a lack of historical knowledge.

The Proposal and the Shortcomings

The proposals that I have seen floated regarding student loan debt cancellation center around:

  1. An executive order (so they would apply to Federal loans, not private loans)

  2. I have seen the numbers for debt relief largely vary between $25,000-$50,000, with a few proposing total forgiveness.

  3. There is no mention of anything other than student loan forgiveness.

Debt jubilees have worked in the past (link is a pdf download of an econ paper - for those who want just an article: here). Freeing Americans from the burdens of debt, even if only partially, would go a long way to putting this country on surer footing. Private debt has exploded in the US, to an even greater extent than government debt. Deleveraging is needed.

Accepting this, we must now move on to the shortcomings of the Student Loan forgiveness proposal. I will outline four critiques of the proposals and will explain how to respond to them with a better all-around policy.

  1. It may be regressive. Only 45 million (~1 in 5 adults) possess student loan debt, and it is largely held by richer individuals. There are ways around this, including a progressive forgiveness schedule. But this is a band-aid and not ideal.

  2. It is unfair. It effectively punishes all those who spent their time and money on paying back their debts when they could have been investing that money elsewhere. It acts as a massive tax on those people. All of that money was for nothing.

  3. The Moral Hazard argument. If the government is going to bail you out every time you do something wrong, why should you focus on doing right vs. wrong? Any bad decision you make and you’ll be rescued by big daddy government!(notice the corporate socialism connections here)

  4. It will not be very effective. Even an extreme student loan forgiveness (forgiving all outstanding student loan debt) may not cause much more than a transient bump in incomes. And that may be “soaked up” by increased rents in the cities where college graduates tend to cluster.

Points 3 and 4 will have to be dealt with through other reform. In other words, you need to reform the system so that this kind of explosion in debt doesn’t happen again. You need serious deleveraging.

Points 1 and 2 can be resolved simply: every single person in the country receives the same amount of debt forgiveness.

Ho boy. How the living fuck are we going to make that work? Buckle in kiddos, we’re going on a ride.

A Not-So-Modest Proposal

Since we’re going balls to the wall, I’m going to stick with $25k worth of debt forgiveness. That seems roughly in line with the average student debt burden in 2020, and it also makes things easier for me to calculate. You can rework the proposal with $30k or $50k or whatever. It just costs more. And places harsher penalties on businesses (more on that soon).

There is an important point to remember about the student loan forgiveness proposal: it focuses on federal loan relief. This is insufficient since not everyone has federal loans, but it also introduces an interesting idea:

Did you know the United States government provides loans for lots of different things? Housing. Agriculture. Business. The list goes on.

Did you know that the United States government, through its own agencies or through Government Sponsored Enterprises, directly or indirectly owns nearly half of all residential mortgage loans?

There are ample opportunities for federal loan forgiveness. Let us begin by amending the proposal regarding federal debt (we will get to private debt soon):

  1. If you have federal student loan debt equal to, or in excess of $25k, you will receive $25k worth of forgiveness. This forgiveness will be applied to principal first, then to interest.

  2. If you have federal student loan debt less than $25k, the remainder of the forgiveness will be applied to federal loan debt of any kind (mortgage, agri, etc.). This will be applied to principal first, then to interest.

  3. Potential Alternatives:

    • If you do not have any federal loan debt of any kind then you will be granted a $25k credit towards a federal loan in the next 10 years. In other words, $25k off your mortgage, etc.

    • You may also decide to take a $25k tax credit spread across 10 years ($2.5k per year)

Yes, I know, point 3 seems like it could be absurdly expensive. It will be, for now. The proposal is not yet done. We have presented a more comprehensive proposal for debt forgiveness that now covers more people, but we have only presented options for federal debt. What about private debt?

The Schools Must Pay

When I talked about reform for future loans, the center of this debacle is the colleges themselves. They preyed upon millions of young people who were told by everyone in society, including future employers, that they were nothing without a degree, however useless the “education” may have been.

“If the debt is so odious that is must be cancelled, then it was fraudulent, and the universities were the perpetrators of the fraud.”

Any forgiveness of private student loan debt must come from the institutions themselves. However they wish to satisfy that financial dilemma is up to them, but they are the ones responsible for this. Talking about moral hazard and corporate socialism, you cannot effectively bail out the lender as they will simply keep incentivizing more young students to take out loans to become part of the credentialed elite. The schools must have skin in the game. This kind of debt explosion cannot happen again. They must be punished.

“But they will go bankrupt!!!!!”

The university system in the United States, like the rest of its education system, is an absolute joke. It ruins peoples mental health. It really is not necessary. And if it goes bankrupt, nothing of value will be lost. The researchers will find new jobs and employers will go back to being forced to admit the vast majority of jobs do not really require college degrees. Maybe they’ll finally bring some training back.

Now, if the universities did what they actually claimed to do, and provide students with a serious ground for critical thinking, etc., I would consider this proposal anathema and ditch it. But they do not. Anyone who has been through 4 years of college in the United States knows that critical thinking is only allowed within certain domains. They are jokes. They deserve none of our sympathy. Let them go bankrupt.

Recap: Where the Proposal Stands Now

So with the addition of the private student loan debt approach, we have the new proposal:

  1. If you have federal student loan debt equal to, or in excess of $25k, you will receive $25k worth of forgiveness. This forgiveness will be applied to principal first, then to interest.

  2. If you have federal student loan debt less than $25k and you have private student loan debt, the remainder of the forgiveness will be paid off by the university(ies) that you attended.

  3. If you have federal student loan debt *and* private student loan debt less than $25k, the remainder of the forgiveness will be applied to federal loan debt of any kind (mortgage, agri, etc.). This will be applied to principal first, then to interest.

  4. Potential Alternatives:

    • If you do not have any federal loan debt of any kind then you will be granted a $25k credit towards a federal loan in the next 10 years. In other words, $25k off your mortgage, etc.

    • You may also decide to take a $25k tax credit spread across 10 years ($2.5k per year)

(I am avoiding medical debt for now because healthcare is its own box of worms and dealing with medical debt and costs effectively would make this piece 3x as long and it’s already long enough).

There are other add-ons you could have.

Obviously being able to discharge the remainder of your student loan debt in bankruptcy is important. But that’s just getting started!

Imagine a child credit, where you could choose from one of the following:

$10k/child forgiveness on mortgage loan or an added $10k (over 10 years) tax credit per child, or maybe $10k added to education plans like 529’s (if universities are still around).

There are a lot of places to go with this. Lots of opportunities. It’s time to get creative. No selective, regressive, ineffective debt jubilees. It’s time for a jubilee for me and thee.