Student loans: why cancelling them is the next frontier of modern monetary policy

We’ve already seen money printing and negative interest rates. Could writing off student debt be the next economic stimulus?


The US government may forgive any and all student loans as fast as they can get the papers signed

Our friend Russell Napier of ERIC has been telling us for years that we have to be creative when we think about just how far governments might go in their use of extreme monetary policy. Negative interest rates are no surprise to him; nor will capital controls be when they are extended across the West (negative interest-rates don't work brilliantly if everyone is allowed to shift cash into different currencies).

He has also told us before that (while he disapproves of it entirely) he fully expects to see helicopter money, the cancellation of the government debt currently held on central bank balance sheets (thanks to quantitative easing), and the cancellation of American student debt one of the main things holding back the spending of young people in the US.

I thought of that when I was reading last week's Wall Street Journal: "Thousands apply to US to forgive their student loans." It seems that in the last six months, around 7,500 borrowers (owing $164m between them) have asked the government to cancel their loans on the back of an "obscure federal law" from 1994 that allows debt forgiveness if students have been "defrauded" by their colleges.

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The law doesn't sound like it was particularly well drafted it doesn't specify what counts as fraud. But the students reckon that if a college promised them a high-earning job on graduation, and they haven't been able to find one, they've been had. They may well be right.

The college boom in the US has meant more students than ever enrolling at for-profit colleges and paying fortunes to do so. Student debt has tripled in the last decade to $1.3trn, and all too many graduates sitting on debt of $75,000-plus in a lousy job market will now know they didn't get good value.

The government clearly knows it too: the US Education Department has already agreed to cancel $28m of debt for former students of bankrupt Corinthian Colleges, and, says the WSJ, "has indicated that many more will likely get forgiveness" for debt they have already repaid as well as for debt that they still owe.

It's hard to tell how many more will get forgiveness before this year the government had received only five applications (three approved). But if student activist Luke Herrine has his way, millions more may get it. His group, Debt Collective, is calling on the US government to cancel debt not for individual applicants, but for entire years of students.

Interestingly, this isn't the only piece of legislation that is allowing US student debt forgiveness. Another kicks in next year and will allow hundreds of thousands of people working in the public sector to make their loans disappear too.

The US government may not have intended things to work out quite like this, but my guess is that instead of finding ways to backtrack on loan forgiveness (as you might expect) they'll note that the whole process is pretty expansionary in nature (the debt-free will be able to get out there and buy stuff) and forgive any and all loans as fast as they can get the papers signed. Just as Russell predicted.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.