Larry Summers kept himself in the news Monday with what he surely realized would be a series of mildly controversial tweets on the prospective economic impact of student debt relief.
The Biden administration is struggling with the issue, a hot-button topic for Progressives ahead of the midterms.
Multiple extensions to a payment moratorium implemented during the pandemic allowed the White House to kick the proverbial can, but the persistence of generationally high inflation made it virtually impossible for Biden to make good on a pseudo-promise from the campaign trail.
Although Biden never committed explicitly, he did allude to the possibility of forgiving $10,000 in student debt for most borrowers. For many Progressives, that’s a slap in the face. They generally want $50,000. For many Republicans, even $10,000 is perilous given the potential read-through for demand when price growth is triple or quadruple the Fed’s target.
America’s student debt burden sits at roughly $1.7 trillion (figure above).
This is a long-running, and mostly intractable, debate. I largely avoid it for two reasons.
First, student debt relief without system-wide reform is pointless. Higher education is unaffordable for many Americans, in part due to perverse incentives. Much like healthcare, there’s a (strong) argument that making it free for everyone would be cheaper in the long-term. But such proposals are habitually (and possibly unfairly) castigated as financially ruinous in the interim, which makes them non-starters. Since political expediency means never acknowledging that too many successive “interims” eventually add up to the “long-term,” the problem will never be fixed.
Second, there’s no chance (none) that students, former or current, will repay the entirety of the $1.7 trillion debt pile. I’m allergic to suspending disbelief in the service of avoiding uncomfortable realities. Most people are happy to do so, though, and because I refuse to join the rest of humanity in such endeavors, I’m de facto excluded from certain debates, this being one of them.
I have no answers to this problem. None at all. But of this much, I am absolutely certain: This debt is never going to be paid back. Not in full. Not even close. It doesn’t matter how many reminders, letters, pleas and/or collections notices we send out. Many of these borrowers will simply ignore them. Forever. And for borrowers who care nothing about their credit, there’s very little anyone can do about it.
These aren’t car loans. You can’t repossess someone’s college degree. And even if you could, what would you do with it? These aren’t home loans either. You can’t foreclose on a diploma and then resell it. If someone owes you a $600 car payment or a $3,000 mortgage payment, that’s their problem. If every third or fourth or fifth person in America aged 27 to 50 owes the government $1.7 trillion for college degrees, that’s Uncle Sam’s problem.
Again, I don’t have the answer. I’m just telling you the truth. And I hope I was able to elicit at least a few laughs in the process.
With that, here’s Larry Summers:
I hope the Administration does not contribute to inflation macro economically by offering unreasonably generous student loan relief or micro economically by encouraging college tuition increases.
Every dollar spent on student loan relief is a dollar that could have gone to support those who don’t get the opportunity to go to college.
Student loan debt relief is spending that raises demand and increases inflation. It consumes resources that could be better used helping those who did not, for whatever reason, have the chance to attend college.
It will also tend to be inflationary by raising tuitions.
The worst idea would be a continuation of the current moratorium that benefits among others highly paid surgeons, lawyers and investment bankers.
If relief is to be given it should not set any precedent, it should only be given for the first few thousand dollars of debt, and for those with genuinely middle class incomes.
Summers has, of course, been very critical of the Biden administration’s stimulus efforts, blaming them, in part, for America’s inflation problem.
More recently, Summers supported Democrats’ tax and climate plan, but continues to fault the administration for mismanaging supply and demand.
You can always count on Larry. And he was the head of Harvard at one time. (Well I guess most of his students/graduates did not have this problem).
Larry always asks himself “What would Jeffrey do” before he speaks.
If student loans could be discharged through bankruptcy, it would be a step in the direction of a solution.
That depends on who the lender is. The money given by the government through loans to support students is already gone, a sunk cost in every sense of the word. Money advanced by private lenders without some sort of a government guarantee is another matter. They have real money to lose from bailouts. However, there is no additional cash outflow involved with pure government student loans, only those thorny minor principles that currently viciously divide us as a nation. Do we want an educated workforce or not? Our competitors now take education more seriously than we do. I’ve taught students that came from their systems and they run circles around us. Politics aside, “good” jobs are unavailable to dropouts and won’t ever be. One other thing, it’s not college loans from state schools that bury our folks, it’s expensive professional education and tuition from for-profit schools. The tuition for programs from those folks often runs twice that of a good regional state university. Even expensive liberal arts colleges offer much non-loan financial aid. Larry was President of a university whose endowment earned $10 bil last year. A 4% payout from its $54 bil balance would provide over $2 bil in support of the school’s budget. I suspect that would allow all the school’s students to attend for free.
“One other thing, it’s not college loans from state schools that bury our folks, it’s expensive professional education and tuition from for-profit schools.” That pretty much explains the root cause of the problem Mr. Lucky. Larry Summers and his finance friends couldn’t care less about ordinary people’s debt problems. The only reason this is an issue is the need to protect the predatory lenders by bailing them out while making it look like they are helping ordinary folks. If a person was stupid enough to bury themselves in debt to attend schools like ITT and Trump University or spend six years at a junior college studying music, they can live with the result. Hope they learn something about predatory finance from the experience but I doubt that they will.
Yes, and if I understand this correctly, in this case the discharge has already been mandated to be tax free
I don’t think of student loans as being similar to mortgage debt or a car loan. I think of them in terms of credit card debt, and I personally feel that the lender and the borrower share the responsibility for the loan – not the taxpayer. I agree that our society benefits as a whole from an educated population, but I don’t necessarily agree that all college education benefits society. A liberal arts degree with a minor in drinking is just a break between high school and work. Expensive degrees that have little professional demand ought to be paid for in cash in advance. I didn’t have money to go to college. I spent my college years at a federal academy in uniform and owed six years of service at graduation. I had a choice between two degrees. It was a great opportunity.
Lack of familiarity with some basic concepts taught in liberal arts curriculums is part of what’s destroying America’s social fabric. For example, half the country seems oblivious to social contract theory, which is the bedrock of a functioning society. Similarly (and I mention this all the time), many of today’s “Libertarians” couldn’t name a single Libertarian thinker. That’s problematic, to put it nicely. Everyone needs (indeed, I’d suggest everyone deserves and is entitled to) at least some free education in liberal arts. Look up the definition of liberal arts, imagine a society where 50% of the population has had no education in those areas, and you’ll have a pretty good idea of why Americans are so gullible, vulnerable to manipulation, predisposed to conspiracy theories and increasingly unable to communicate with one another in an intelligent way. Being a mechanic or an engineer doesn’t preclude liberal arts studies. The whole reason liberal arts courses are required for four-year degrees is to ensure that no matter what you choose as your occupation, the public is at least some semblance of educated in a holistic sense of the term.
Perhaps federally funded loans should be preconditioned on some liberal arts classwork. I’d add requirements for statistics and civics.
Well good points all. But liberal arts, government, citizenship and critical thinking should be covered in high and middle schools for all- you should not have to attend college to get that education- my daughter has gotten that at both levels in NYC public schools. Liberal arts are fine in college as long as the students are filled in about their job prospects/careers/incomes upon graduation (many are ignorant of this)- as long as there is disclosure I am fine with someone studying what they wish. As far as libertarians go, note that Ayn Rand collected social security- Paul Ryan’s college education was largely financed by social security as his father passed away and he received survivor’s benefits (not a libertarian but you get the idea- he tooted about social security “reform” and then he married into the richest family in his town in Wisconsin- he delivered pizza one summer but really never held a professional job outside of government….)
Unfortunately, many of those folks who need that type of liberal arts education would never allow it in their local middle and high schools because they view it as brainwashing. The irony, of course, being that those same people will subject their children to church years before they get any formal schooling, let alone exposure to liberal arts.
As for me, I would consider it the ultimate failure on my part as a parent if my children just believe everything I believe. My only goal for their education is that they learn how to think for themselves, but far too many parents view their job as teaching their children what to think.
At 42 i earned an associates with most of the course work in Biology/Science. I had a big problem with having to pay for liberal arts classes to get my little degree, and saved those unfairly begrudged courses for the last semester. A few weeks into those courses i realized the concepts were directly applicable to all of my communication responsibilities at work and beyond. What a fool i had been. It helped synch up my cross discipline advantages to catalyze utility.
If you can understand some of the basics of art (atmosphere, movement, composition) etcetera, you can paint your own pictures (literally and figuratively), if you can paint a figurative picture for someone you can effectively communicate with them.
Thank you for your sacrifice and service.
Dealing with the current student debt pile is more of a political dilemma than an economic one.
From an economic standpoint, the answer is fairly obvious in my opinion. Identify the debtors who don’t need relief (professional degrees, significant income) and don’t give them any. For the rest, provide limited relief on a sliding scale, layering outright annullments, restructuring, a BK option.
The political dilemma is because there are lots of debtors who are well able to pay back their debt but see the opportunity to avoid doing so, and they overlap greatly with the young progressive wing of the Dem party, whose voters and energy Biden needs.
The bigger issue is the going-forward situation. The college students of tomorrow are going to be right back in the same situation as the college students of yesterday, unless the system is fixed.
Basically, it is too easy for students to take on excessive debt, too profitable for schools and lenders to entice them to do so, and too few alternatives such as lower-cost schooling, work-study funding, and subsidized education in fields experiencing serious shortages (healthcare, teaching, trades, etc).
As one little step, I’d require every student taking on debt to take annual classes on how much debt they can responsibly assume, not taught by the schools (who have an incentive to inflate the earnings potential of their graduates). I’d also require schools to track and report the post-graduation income of their graduates (with IRS coordination, this would be easy). And I’d limit the federally guaranteed student debt that a student can take on (higher debt loads would have to be privately underwritten with no federal backstop and subject to normal BK discharge).
Student loans are not inherently a bad thing, but it’s become a profit-driven business where the student is the cow to be milked and slaughtered rather than educated and trained for work.
…And the responsible, hard working people who managed to get through college without taking on any debt because they got a job to pay for tuition or went to a less expensive school?
Just screw them?
All government policies (or lack thereof) benefit people unequally in some fashion. Tax rates vary over time, different types of income have different tax rates, tax credits or subsidies incentivize certain behaviors. We’re all getting screwed one way or another if that’s the way you choose to look at it.
The other option is to recognize that it might be good policy for people not to be burdened with massive debt. Are there some folks who probably don’t need or deserve to have their debt wiped out? Sure. Would it be great if we could also reward those who managed to get through college without debt or already paid it back? Sure. Does it ultimately create a net benefit to society if we bail out people who took on student debt? I would say yes in the same way that it was worth bailing out banks during the financial crisis. Did I get a direct benefit from the banks being bailed out? No, but I’m glad they did because it provided a net benefit to society (imho).
Yeah, that’s the thing. Everyone claims to know life isn’t fair, but we constantly suggest we don’t really understand that simple concept.
Besides, what even is “fair?” You can take the exact same conjuncture and call it unfair from two different vantage points. For example, you might suggest it’s totally “unfair” that investors are buying up a larger and larger share of the US single-family housing market, thereby creating a number of self-fulfilling prophecies that benefit investors over families and renters. Based on that (wholly defensible) position, you might suggest putting in some manner of common sense guardrails to ensure investors don’t distort the market beyond recognition. On the other hand, an investor might say something like this: “Well, I have cash. I don’t need a mortgage. That house is for sale at $550,000, and so are 15 more just like it. I want all 16 of them, and I have the money to buy them. I didn’t inherent my money, and I didn’t do anything illegal to get it either. I worked hard for every last cent of it, and I paid taxes on it, and now I want 16 houses. So I’m gonna buy them. And it’s totally unfair for people who didn’t work as hard as I did to tell me I can’t have them. If my purchases contribute to a spiral that makes housing unaffordable for everyone else, well that’s a shame, but too bad, so sad. Everyone else should’ve worked harder.”
Who’s right in that scenario? Who knows. Both? Neither?
Also, it’s not as simple as the apocryphal hard-working student who got a good job and paid tuition. I’ve been in and around academia for most of my adult life and I can count on one hand the number of people who can honestly say they paid every cent of their own tuition (never mind the cost of physical books, when physical books were still a thing) by working an honest job while juggling a full course load at a decent school.
That’s very difficult to do in practice. To afford tuition at a major university, you’d have to have a very good job or work a ton of hours at a job that isn’t so good. Good jobs generally require degrees and working a ton of hours isn’t conducive to taking school seriously.
It’s a political trap, no matter what Biden does, it will be too much and not enough. What I wish Biden would do: address the nation, demand bipartisan legislation, and announce that as a stopgap until said legislation, zero percent interest on student loans as long as some minimum payment is being made
Good….
More generally, Summers and others’ generic position of “don’t give that $X to that population of poors P, it’ll be inflationary” seems like pearl clutching.
Because if you fund “give $X to poors P” with “tax $X from riches R” then it isn’t inflationary.
Oh, right, mismatched marginal propensity to spend. So tax R some multiples of the $X going to P, and reduce the deficit.
At the end of the day, reducing wealth inequality is worth moderate inflation, and moderate inflation may turn out be one lever to reduce wealth inequality. (Via the wage inflation and discount rate mechanism – discussed earlier.)
As I have a kid starting college this fall, this is a good topic. I do believe that college debt is the first lesson kids get in money. My wife and I convinced my son that a bachelars degree is the goal but he could save 40%-60% on tuition if he went to Community college first. We looked at the four year schools and the tuitions. We also had him start work at 16 to start saving. So we are hoping that he can make it though the community college all paid, then take out loans for the last two years.
I do think that as a society we are failing the new generation without giving them a chance at a college education. The generation older than me doesn’t understand it because when they went to college it was $500 a year. They have no comprehension that it can cost 90-100K for a 4-year degree or more. Remenber the most sucessful education program the US government ever implemented was the GI bill. I know that the military does still give scholorships and I thnk that should always continue. I also think not everyone can make it in the military. So I think that the Federal scholorship criteria should be drastically reduced based on the parents income and assets.
Education should be at least partially subsidized- as an educated workforce helps our country as a whole. At the same time, the focus needs to be on lower to middle income families and also on non-college alternatives such as job training, vocational education, and better apprentice programs. It is unfair, and elitist to subsidize college while not offering help to folks to better themselves with other ways of learning or in other fields that do not require college. And it is really bad for our country as a whole. When I hear folks denigrating folks that work with their hands or use technical skills, it makes me want to cringe. Justmyopinion is taking a practical approach to his situation with his child and it makes perfect sense. I do not know what kind of student his child is, but the fact that he/she is foreclosed on sending his child to a 4 year university for money reasons, while practical to go to community it is a unfortunate if the student is very accomplished and capable of attending a university. However, there is no shame in community college. I went to university with plenty of transfers from community college, and often they were better and more motivated students.
Thank you, I was anticipating having to write your comments myself, but you nailed it. Besides, in this day and age of increased scarcity in skilled jobs like plumbers, electricians, etc, there is a good living to be made in those types of fields.