Merryn's Blog

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?

160202-student-debt

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.

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.

Recommended

The US Federal Reserve is about to rein in its money-printing – what does that mean for markets?
US Economy

The US Federal Reserve is about to rein in its money-printing – what does that mean for markets?

America’s central bank is talking surprisingly tough about tightening monetary policy. And it’s not the only one. John Stepek looks at what it all mea…
23 Sep 2021
I wish I knew what contagion was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what contagion was, but I’m too embarrassed to ask

Most of us probably know what “contagion” is in a biological sense. But it also crops up in financial markets. Here's what it means.
21 Sep 2021
The charts that matter: more pain for goldbugs
Economy

The charts that matter: more pain for goldbugs

Gold investors saw more disappointment this week as the yellow metal took a tumble. Here’s what’s happened to the charts that matter most to the globa…
18 Sep 2021
With the right political will, inflation can be defeated
Inflation

With the right political will, inflation can be defeated

Governments and central banks can easily control inflation, says Merryn Somerset Webb – they just need the will.
17 Sep 2021

Most Popular

Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021
The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021