The educational-industrial complex is laughing all the way to the bank.
By Wolf Richter for WOLF STREET.
One person’s loan is another person’s asset. If the loan is canceled, the asset is destroyed. That’s how it is.
No one is making payments on government-backed student loans anymore, after two years of forever-forbearance, countless campaign promises of forgiveness, various targeted forgiveness programs already in effect, and now the biggie, the general forgiveness program being hashed out.
Total student loans outstanding, assuming they’re even still “loans,” remained at $1.59 trillion in Q2 compared to Q1, according to the New York Fed’s Household Debt and Credit Report. They have been relatively stable since the Q1 2020, as new loans were being added, while practically no one made payments, and as the numerous forgiveness programs are whittling down the tally from the other side.
Federal student loans.
Federal student loans account for about $1.3 trillion of this $1.59 trillion in total student loans, according to a separate report from the New York Fed. The remainder are Family Federal Education Loans (FFEL) owned by commercial banks, and private loans.
It’s the $1.3 trillion in federal loans that were all moved into forever-forbearance in the spring of 2020, and that are now up for forgiveness.
The median balance of federal student loans is $18,773 – meaning half of the federal student loans balances are lower than $18,773, and half are higher.
The outliers everyone is talking about, the $150,000 and $200,000 loan balances, were accrued by a small percentage of borrowers going to law school, medical school, etc., most of whom are now in high-paying careers and don’t need loan-forgiveness at all.
Forever-forbearance “solved” delinquencies.
The amount of student loans that were 30 days or more delinquent plunged from the official 9.4% of total balances before the pandemic to just 1%.
For federal student loans, the delinquency rate is 0%. All of them were automatically enrolled in forbearance programs in the spring of 2020, which have been renewed over and over again and are still in effect. When a loan is moved into forbearance, it is reclassified as “current,” not “delinquent,” regardless of payment status.
FEEL and private student loans, which were not enrolled in forbearance programs, accounted for all the delinquent loans.
Student-loan forgiveness and cancellation.
In addition to the list of existing student loan forgiveness programs – Public Service Loan Forgiveness, Teacher Loan Forgiveness, Closed School Discharge, and others – there is now the forgiveness when students feel that the educational-industrial complex screwed them.
So just on Thursday, a federal judge granted preliminary approval of a settlement that would cancel $6 billion in student loans of over 200,000 students who claimed they were defrauded at 153 mostly for-profit colleges.
Few of those schools have been held to account. So it’s the taxpayers that will pay the $6 billion, not the educational-industrial complex that got the $6 billion over the years, laughing all the way to the bank.
And the biggie, a general forgiveness program is currently being hashed out by the administration. The proposal started out with $10,000 in forgiveness per borrower. But this stinginess of the taxpayers is leaving a lot of voters deeply frustrated, and the anger is boiling over, putting politicians under pressure to buy more votes, or re-buy the same votes, by raising the forgiveness amount to $50,000, maybe with income caps.
Next, auto-loan forgiveness… Just kidding, kind of.
The average transaction price of new vehicles is nearly $46,000, and the average advertised price of used vehicles is $28,000.
By comparison the median government-backed student loan is $18,773. Just another consumer loan. It’s not the end of the world having to make a $200 payment every month for 10 years – and wage increases and inflation over 10 years will reduce that burden.
And if people cannot even make a $200-payment, they cannot make a $400-payment or $800-payment on an auto loan either. So when are we going to buy votes with promises of auto-loan forgiveness?
It’s unfair that people who bought a car because they need to drive to work would be forced to pay off those loans. We need to have general auto-loan forgiveness. The government could just buy up all the auto loans outstanding and then forgive them, up to $50,000 each, maybe with some income caps, such as $250,000 per individual and $500,000 per married couple filing jointly.
Think of it this way: It would be a huge boost for the economy because, instead of making car payments, those folks could then blow their money on other stuff.
It’s not fair, but fairness has nothing to do with it.
The government (taxpayers) funded these student loans by borrowing in the Treasury bond market. It then handed this borrowed money to the educational-industrial complex via the students, expecting to get paid back most of the money, plus interest, by the borrowers after they start working. Their payments would have helped the government service the debts that it incurred to fund the student loans. But that’s over. Going forward, the taxpayer pays off the loan of the borrower.
In other words, the waiter that would have liked to go to college but couldn’t afford to now has to pay off the student loans of software engineers that did go to college. It’s not fair, but fairness has nothing to do with it. This is about vote buying. And they’re hoping the waiter cannot figure this out.
Allow bankruptcy courts to decide what gets discharged and how much borrowers have to pay every month.
Borrowers currently cannot get their student loans discharged in the bankruptcy court system. But they found something much more appealing in order to get rid of their debts: Politicians eager to buy votes with other people’s money, namely with taxpayer money.
But that doesn’t need to be that way. These same politicians could change the law to allow student loans to be discharged in bankruptcy courts.
So it would be a judge that decides how much that coder with a degree from Stanford can pay every month for the next 10 years, and how much that teacher with a degree from OSU can pay every month. And the judge can then discharge the rest that cannot be paid. Personal bankruptcy has worked that way since the Bankruptcy Reform Act of 2005. In personal bankruptcy filings, people cannot just walk away from all their debts.
Student-loan borrowers would then think about whether to tough it out and make the payments; or file for bankruptcy, get the blemish on the credit report, get part of the student loans forgiven, if any, and make payments under a court order for many years.
This system is already in place for personal bankruptcies. It’s not perfect, but it’s functional. And it would provide relief to borrowers who really cannot pay. And it would be a lot fairer to everyone around, including the waiter that couldn’t afford to go to college and doesn’t really want to pay off the student loans that other people had incurred getting their degrees.
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