Nation of Beancounters

Why is everyone so hung up on student debt?

Posted in Uncategorized by Navin Kumar on October 21, 2011

I’m not following the Occupy Wall Street Movement (wrong country) very closely but I noticed that debt is a very big theme. I suspect that it’s the result of many of the protesters being students with large loans (I went to government-run college myself and suffer no such thing). More generally third world debt is big topic of concern, with many groups demanding debt relief.

I won’t comment on the third world issue but I can’t help find the student debt concern odd.

There’s no such thing as a free lunch. There are two methods by which debt relief could happen. In both cases, the government announces that students (current and former) no longer have to repay their loans. At this point the government can a) compensate the banks and other financial institutions for the loss (as the Indian government did a few years back with farmers) or b) not compensate, effectively declaring that the banks have to bear the brunt.

Case (a) represents a massive transfer from taxpayers (future and current) to students. But given the (ever increasing) graduate/non-graduate wage gap this would be a regressive transfer.

Case (b) may seem more tempting: stick it to the banks! The problem? There is no such person. The cost of the loss will be borne by people: depositors, employees, investors, borrowers. Depositors may lose their deposits if banks collapse – but thanks to the deposit insurance, it’s the taxpayer on the hook for that one. Employees may be fired or if they have banking-specific skills face a lower wage. Good luck securing a student loan if you apply just after the announcement – unless the government can credibly declare it won’t do this again (it can’t) there’s no way a bank will extend student loans except at premium interest rates. And let’s not forget what a credit-crunch does to an economy. Anyone who thinks that the costs will be borne by the crisis-causing CEO is an idiot.

And finally, it seems odd to equate a bunch of students who choose the level of education, they type and expense level, eyes open, with people who were born into poverty and therefore deserve some kind of “not-at-fault” security/insurance net.

People seem to now hate financial institutions so blindly that they jump on anything that sounds like it’ll hurt them, forgetting who they’re targeting and who they’ll hit.

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