Last week ProPublica reported that Freddie Mac and Fannie Mae had run new analyses on the effects of widespread mortgage principal write-downs,. They found that such action would not only would this help keep many Americans in their homes, it would also, counterintuitively, help Fannie and Freddie’s bottom line. Foreclosures are expensive, lengthy processes, where lenders often get stuck with a house of seriously diminished value. By writing down the outstanding principal on the loan, Fannie and Freddie can likely keep people in their homes: the costs of the write-downs outweighing the benefits of seeing a mortgage paid down to completion.

This raises a pressing question: would the same be true of student loan forgiveness?

Student loan debt is structured differently from mortgages. Mortgages typically have a strict 30-year repayment period. More importantly, after a few months of not paying your mortgage, your lender may start foreclosure proceedings — taking the asset, your home, as collateral. Student loans, by contrast, do not have a strict amortization schedule and the asset — your education — cannot be stripped away from you and sold. If only! Accordingly, those who have student debt may not file for bankruptcy to restructure or discharge student debt, except for in rare instances.

This adds a wrinkle to the debate over student loans, the aggregate debt of which just crossed the $1 trillion mark in recent months.

Washington acknowledges the problem

As the debt level has risen, so has the debate over what to do about it. Rep. Hansen Clarke of Detroit, introduced a bill to forgive student loan debt in exchange for a certain percentage of income paid over the course of a decade.

A statement from the newly-minted Consumer FInancial Protection Bureau acknowledged that the growth of the amount of student debt could damage our already fragile economic recovery.

“Excessive student debt can slow the recovery of the housing market,” wrote Rohit Chopra, the CFPB’s student loan ombudsman, in a blog post on the agency’s website. “Student loan borrowers are sending big payments every month to their loan servicers, rather than becoming first-time homebuyers. This debt can also put added stress on the borrowing capacity of the household and government sector.”

Chopra, speaking at the Consumer Bankers Association convention in Texas, told an audience of industry insiders that excessive student debt could be hurt banks in the long-run, reports American Banker. “If these borrowers are so over leveraged that it carries throughout their entire adult life, this is a big problem,” he said, according to AB.

Economists disagree

Given all this it would seem to follow that converse might be true: that lower amounts of student debt would make the economy recover faster, banks perform better, etc. But economists fail to see the appeal of forgiving student debt.

A post by Justin Wolfers on the Freakonomics blog from late 2011 trashed the notion that reductions in student debt would be a meaningful form of stimulus. He makes a frustratingly convincing five-point case I have taken the liberty of summarizing here:

1. College grads are not deserving of a redistributive wealth policy of this sort because they’re the most capable of improving their lot.
2. From a macroeconomic standpoint it’s unwise, because debt forgiveness doesn’t necessarily lead to more dollars spent in the way that cash stimulus does.
3. It won’t increase access to education, whereas upfront subsidy would (we recently made this same point).
4. This could lead to a slippery-slope effect where all sorts of debt holders come to the government seeking forgiveness.
5. The rhetoric surrounding the policy suggests only worst possible alternatives — corporate subsidies and bailouts — instead of the actual alternatives like giving money to the poor.

Points one through three are especially difficult to refute, while four and five are somewhat speculative and cheap — some billionaires and millionaires have been bailed out already by the government, so it’s not a petty political point to mention this. Nor would student debt holders be the group making this slope slippery.

An appeal to common sense

Robert Applebaum, a lawyer and self-styled advocate for student loan debt forgiveness, would tend to disagree.

“Don’t even get me started on that Freakonomics article,” he wrote in an email. “Wolfers has no idea what he’s talking about. First of all, he’s from Australia, where education is free up front and you repay it based on a percentage of your income. Second of all, he makes the assumption that all college grads make enough money to pay off their student loans. Not true. Middle class wages have gone down over the past decade, not up. College grads can’t keep up with the payments.”

“[Wolfers] talks about opportunity costs,” wrote Applebaum, “but ignores the opportunity cost of saddling entire generations of educated Americans with so much debt. As a result of these debts, they’re not starting businesses or families, investing, inventing, consuming or buying homes.”

That Wolfers makes no mention of the differential between wage growth and tuition inflation speaks to Applebaum’s retort.

Applebaum also pointed to the White House’s official response to a “We The People” petition he started on their website. In it, Roberto Rodriguez, Special Assistant to the President for Education Policy, explicitly states: “We agree that reducing the burden of student loans is an effective way to stimulate the economy and save taxpayer dollars.”

Unfortunately, the Obama administration’s wishes do not always line up with their actions, as Bloomberg Businessweek reported. Certainly one might expect private lenders to use aggressive tactics to get their loans repaid, but federal student loans that go to collection should do so in a manner befitting the president’s stated policies, right? That ain’t happening, says the Bloomberg story. The U.S. Department of Educations uses private collection agencies to rehabilitate loans in default. Frequently this involves aggressive tactics on the collectors’ part, and intentional ignorance of federal programs that have lowered monthly minimums for some federal borrowers.

When giving charity, it is said that the left hand should not know what the right hand does. This isn’t the case with federal policy, however; the Obama administration should strive to be more consistent. The same could be said for how they choose to deal with overhangs of consumer debt: homeowners are getting principal reduction because it helps the economy and it’s supposedly good for Americans to own homes. Why not students? The same principles apply.

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  • TSJ

    Hey lets create another entittlement…………Education were we have the hard working Americans pay for the education of a generation of underachievers.  Bailout after Bailout is all this generation is looking for.  My call to this generation is work hard, save, and pay back your debits. 

    • My generation (born in the 80’s) grew up with a declining middle class, welfare reform, tax breaks for the wealthy, and governmental deregulation. I have a hard time understanding why everyone thinks we’re so reliant on the government. We’d like a government that seeks to create a better society — that’s what baby boomers grew up with. That’s what made life so great for the baby boomers, not their incredible smarts and hard work ethic, though they had plenty of both. 

      • TSJ

        You are right the Boom generation worked hard and paid off their student loans.  Something your generation has a problem doing.  You complain about the cost of education but if you put it in the context of inflation your loan costs were approximately the same size as most boomers who graduated in the 60’s and 70’s.  Remember it was the Boom generation who worked hard and paid taxes so you could get your Grade School and High School education.

        Stop whinning a pay back what you borrowed. 

        • College tuition has paced ahead of inflation by an average factor of about 1.5 for the last few decades ( and has been steady at 2x the rate of inflation over the last decade. 

          So you’re wrong about that. Before the Boom generation, your parents fought in WWII and built the great society they left you. They didn’t pull up the ladder afterwards, likely because they recognized how destructive and nihilistic that would be. Wish the same were true for the Boomers!

          • TSJ

            Okay but salaries have advanced at a good rate also.  Ask any boomer what they made at their first job.  Your generation wouldn’t even get out of bed for that kind of money.

            And don’t tell me about the WWII generation that you never had the pleasure of having as a boss or a coworker.  You think the boomergeneration is tough? Your generation needed to spend a few years working with those guys because then maybe you would not be so soft.

            • Guest

               Born in 1971.
              First job at 16 years old making Missouri Minimum Wage: 2.19/hour

              Let me ask you THIS:
              WHAT was the cost of a new car when you were 25?
              WHAT was the cost of a new house when you were 25?
              WHAT was the cost of a gallon of gas when you were 25?

              Don’t growl because you THINK we’ve got it easy, I’ll NEVER see a dime of the Social Security I’ve been paying in for 25 years to date and will have for 51 years before I can retire (at the CURRENT age of 67 though again, it’ll be a done program by that time). That leaves me paying a tax I’ll never benefit from and STILL putting away for my own retirement which is NOW being eyeballed for further taxation by the government after I’ve paid taxes on the money when I earned it and expect to pay taxes on it when I pull it out.

  • Mid Brown

    I’m on social security disability. I asked for interest rate reduction, reduced payment, and was told by Department of Education, Congress, Sallie Mae, and American Education Services that it was up to the other agency. I owe more now than the original balance due to Sallie Mae capitalizing the interest while I was on long-term unemployment deferment. The predator education facilities promoted their employment rates in order to receive the federal funding, yet have not been held accountable for their fraud. They got the funds at a very low interest rates 0%, and are charging upwards of 18%, and even though 8.5% does not seem like much, it is more than my check each month. 
    I agree that student and parent plus loan forgiveness would in fact stimulate the economy at the level where it needs the boost-the lower income taxpayers, who already have to choose between food, medicine, electricity…and by the IRS not claiming the forgiven amount as taxable, that would allow the taxpayers to get moving in the right direction again.
    If you were fortunate enough to stay healthy, stay gainfully employed, stay stable in a home, and have never known the fear of life-time debt, you are one of a very few. The rest of us have this fear, and it is known on a daily basis.
    Please help support HR4170 and the other bills that will bring back protections like bankruptcy to the student and parent plus loans, both public and private.

    • Surferdudeblog

      I don’t know what is going on with you but if you are on social security disability,  any student loans you have  should be able to be cancelled.  I  know of several people  who have been on  disability and they fill out the paper woprk and in about  2 months they recieve a debt cancellation discharge (they will only do this one time though).  The government then reports to the credit  agencie s that the stduent loans  have been paid and nothing is owed on them. 

  • BailoutLaw

    There is no real loan forgiveness. Here is what the policy is. The student loan will be forgiven as long as you have no earned income for the year. You cannot have earned income above the poverty level, which is around 18,000 dollars per couple. If you have earn income above the poverty level the loan is reinstated with interest. This is what is meant by loan forgiveness.

    • AWSD

      Forgiveness comes at the END of 120 payments (equal to 10% of discretionary income). For current borrowers any remaining balance at that time is forgiven and not treated as taxable income. For those borrowing after HR4170 is enacted the forgiveness is capped at around 40k. This bill provides relief for millions of borrowers of all ages and seeks to restore a sense of fairness and balance to an otherwise corrupt system of lending.

    • Surferdudeblog

      I know of people who  are now getting  social security disability.  They have had their student loans   cancelled/forgiven.  I have seen the documentation.  The process took about two months.  They had  50,000 in debt.  I have seen their credit reports too, and it says, “student loans  paid’   That wa s three years ago  and now  these peopel are feeling a bit better and have  managed to return to the work force  making  36,000 a year.

  • dcnj

     Bail out stupidity…that always works…

  • Pduffy211

    Where is the money going to come from, those sitting on their
    butts waiting for us that are working and paying taxes to pay their loans.  The loans must be paid and will be paid.  If the Fed steps in and forgives those that
    took out the loans and got the education all that leaves is those of us that received
    no benefit from the loans to pay them off. 
    The whole idea qualifies as stupid pandering for college (non-)Student
    votes.  Even those of us with higher
    degrees had to work at low paying jobs in the beginning.  Get out of your mommies cellar and go mow
    some lawns or flip some burgers.  You’re
    not going to go anywhere or become anything living off handouts.  Especially once mommy passes away and you
    have to pay the bills on your own or live on the street.  Time flies and that time will be here sooner
    than you may think!

  • Solivieri01

    And I’m sure TSJ you probably didn’t even take out loans-your parents probably footed your bill.  You really have noooooo clue how much student loans amount to with interest etc.  This would be fine if we lived in an economy that actually produced jobs and let the middle class expand.  We are one of the few countries in the world that constantly talks about reforming education so that we stay ahead, but then makes it unaffordable.