miscellaneous commentary

Personal & Public Debt

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[Prepare for a rant…] I’ve seen an online petition on Facebook and other sites arguing in favor of forgiving the nation’s student loan debt, which is currently around a trillion dollars (making it higher than all outstanding credit card debt). My gut reaction is that this is a horrible idea.

Granted, I am one of those college graduates with outstanding student loans, and I could definitely find better uses for my income instead of handing it over to the federal government. But you know what? That’s the deal I made way back in the summer of 1999, before I began my first semester of college: I would receive a quality education in exchange for paying tuition plus interest when I graduated. I knew the burden I was taking upon myself and I agreed to it. I signed on the dotted line. And I’ve been dutifully paying it back over the past eight years, and am very close to paying it off (I seem to be perpetually three months away, but trust me, at this point I could cut a check from my savings account and wipe the loans out, if I didn’t care about my rainy-day fund).

I live within my means. I have a credit card (through Veridian) but only use it to pay for groceries and gas and other monthly expenses, and I pay off the balance every week, before interest can accumulate. Aside from the student loans and an auto loan for $1000 I took out in 2001 (and which was paid off in 2 months), I don’t borrow money. If I want something, I save my money until I can afford it. Thankfully, ever since adopting a lifestyle philosophy centered around simplicity and minimalism, it’s rare when I feel the need to buy something anyway. If I do, I obey the “one in, one out” rule I set for myself, so my apartment doesn’t become cluttered with junk I don’t really need in my life. Luckily, my monthly loan payments are less than 10% of my discretionary income.

All this is to say I have been faithful in paying back my student loans rather than being the dutiful consumer American capitalism wants me to be. I am going to feel very good when I finally pay off my loans because I will have done so all on my own, without the assistance of anyone. I took on this obligation and I am determined to see it through. It’s my moral responsibility to repay this obligation, as it should be for every college graduate.

I think that’s what chaps my hide about this petition to waive student loan debt. With very few exceptions, college students knew the terms of the loans they were taking out. These loans are totally voluntary!! Now they have a degree, which they get to keep for life, but they want out of their end of the deal. Their main argument centers around the supposed stimulus such a waiver would have on the economy:

Forgiving the student loan debt of all Americans will have an immediate stimulative effect on our economy. With the stroke of the President’s pen, millions of Americans would suddenly have hundreds, or in some cases, thousands of extra dollars in their pockets each and every month with which to spend on ailing sectors of the economy. As consumer spending increases, businesses will begin to hire, jobs will be created and a new era of innovation, entrepreneurship and prosperity will be ushered in for all.

Freakonomics points out a few reasons why this argument doesn’t hold water:

If we are going to give money away, why on earth would we give it to college grads? This is the one group who we know typically have high incomes, and who have enjoyed income growth over the past four decades.  The group who has been hurt over the past few decades is high school dropouts. … If you want stimulus, you get more bang-for-your-buck if you give extra dollars to folks who are most likely to spend each dollar. Imagine what would happen if you forgave $50,000 in debt. How much of that would get spent in the next month or year? Probably just a couple of grand (if that). Much of it would go into the bank. But give $1,000 to each of 50 poor people, and nearly all of it will get spent, yielding a larger stimulus. … Why give money to college grads rather than the 15% of the population in poverty?

College graduates have demonstrated they have the skills and knowledge needed to succeed in life. The last thing they need is a bailout. I’m sorry if the economy isn’t providing enough job opportunities, but bailing them out won’t change that. And from a moral standpoint, those living at or below the poverty line need government assistance more than college graduates (though I’d still prefer to provide assistance programs rather than a simple handout).

Of course, all this says nothing about how profitable student loans are to the federal government:

According to the scrupulously nonpartisan Congressional Budget Office, $37 billion will flow IN to Treasury from student loans made this fiscal year … Treasury can borrow money at 0.5% or less, and lends it to students at 3.4%.   Administrative costs are well below 1%. Prepayment risk is minimal; repayment stretches over many, many years, and the yield spread just keeps on coming.  Interest rate risk is also minimal, given that Treasury can issue debt in a range of maturities.

This video does a good job of recapping some of the arguments against student loan bailouts mentioned and linked to above:


As bad as student loan debt may be, it’s nowhere near the moronic level held by our federal government, currently at $15.7 trillion.

Only one time in our nation’s history have we ever been debt-free. That was during the tenure of Andrew Jackson’s presidency:

In Jackson’s mind, debt was “a moral failing,” Brands says. “And the idea you could somehow acquire stuff through debt almost seemed like black magic.”

So Jackson decided to pay off the debt.

To do that, he took advantage of a huge real-estate bubble that was raging in the Western U.S. The federal government owned a lot of Western land — and Jackson started selling it off.

He was also ruthless on the budget. He blocked every spending bill he could.

When Jackson took office [in 1829], the national debt was about $58 million. Six years later, it was all gone. Paid off. And the government was actually running a surplus, taking in more money than it was spending.

An unreleased government report written in 2000 predicted we could have potentially paid off all national debt by 2012. But it’s unlikely America will ever be debt-free again, for the simple fact that much of our economy (as well as the global financial system as a whole) now depends on the issuance of Treasury bills:

Banks buy hundreds of billions of dollars’ worth, because they’re a safe place to park money. Mortgage rates are tied to the interest rate on U.S. treasury bonds. The Federal Reserve — our central bank — buys and sells Treasury bonds all the time, in an effort to keep the economy on track.

I never would have guessed having no debt (for the country) could be a bad thing. But I still would prefer to have “just a little” debt to the amount we have now.


Written by camcarlson

June 18, 2012 at 6:42 PM

2 Responses

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  1. That’s really interesting. When I went to college, I made a conscious decision to not take out a student loan. I applied for every single scholarship I could get my grubby mitts on. Now, I know that doesn’t work for everyone (seeing as how I just paid off a bunch of Scott’s school loans), but at least I was “smart” enough to actually think about the consequences. I watched the video and I found it interesting that the college graduate unemployment rate is so much lower than the national average. It gives you something to think about.

    And also, we just paid off (using a very large sum of money) Scott’s school loans. It would make me angry that we spent that money when we could have just waited and whined about it.


    June 19, 2012 at 12:51 PM

    • Thanks honey! Oh, and while I understand the hypocrisy of my saying this, I absolutely think that anyone that takes out a student loan should have to pay it back. It’s certainly not the most popular stance to take, but I agree with you Cam.


      June 24, 2012 at 11:49 PM

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