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

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.