Biden Is Off to a Bad Start Under Progressive Pressure

Mish

Under Progressive pressure, Biden ponders canceling $50,000 in student loans.

Rogue Executive Actions 

Biden is already bending to the wishes of Elizabeth Warren and Bernie Sanders to want to forgive student loans. 

On Monday, Senate Minority Leader Chuck Schumer announced Biden ‘Considering’ Forgiving $50,000 in Student Loan Debt via Executive Action.

Schumer held a press conference alongside Democratic Congressmen-elect Ritchie Torres, Mondaire Jones and Jamaal Bowman of New York, during which the group announced they have “come to the conclusion” that Biden can “forgive $50,000 of debt the first day he becomes president.”

“You don’t need Congress, all you need is the flick of a pen and President-elect Biden — then President Biden — can make this happen,” Schumer said.

Asked if Biden will have the executive authority to forgive the debt, the New York Senator said the president-elect is researching that and “I believe when he does his research, he will find that he does.”

Congress, Who Needs It?

I believe we have seen enough rogue executive actions of dubious legality.

Even if legal, this is a terrible idea. It mainly benefits middle-class whites and unfairly so. 

We can’t give money to people at the bottom who have lost their jobs, possibly permanently, due to government decree. But hey, let's  forgive $50,000 in debt to the upwardly mobile.

Less Education for Your Buck

Less Education for your buck

The above chart is from US College Tuition & Fees vs. Overall Inflation.

Please note the acceleration in 2005. What happened?

The cost of education escalated madly when Bush passed the bankruptcy reform act of 2005 making student debt not dischargeable in bankruptcy. 

Flashback 2005

On April 15, 2005, I penned The Deflation Guarantee Act of 2005.

Today Congress passed the “The Deflation Guarantee Act of 2005” currently known as the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005”.

Twenty years from now economists are going to be studying legislation from this Congress and signed by this administration and be wondering: “What the * were they thinking?”.

Anytime this administration passes a law with the “protection” in it, assume it will do just the opposite.

This was a bill written by loan sharks, and bought via payoffs (otherwise known as campaign contributions) to those voting for this bill. It has NOTHING to do with “Consumer Protection”.

I believe this will backfire in many ways, and not all of them are fully understood yet.

Disease vs Symptoms

I graduated from the University of Illinois in 1976 with a degree in Civil Engineering. The cost of tuition was $250 a semester when I entered college in 1971.

Some blame states for not contributing to education. Indeed, states would would not raise taxes to cover escalating costs because of voter backlash.

But that is blaming the disease on the symptom. The disease was then and still is high administration costs, public unions, outrageous coaching contracts, unbelievable pensions, and serious lack of competition. 

Five Student Loan Facts 

Brookings 5 Facts #1

Brookings has a set of Five Facts About Student Loans that everyone discussing forgiveness needs to be aware of. 

  1. Six Percent of Borrowers owe a third of the outstanding debt.
  2. About one quarter of borrowers who have about half of the debt borrowed for graduate school.
  3. The individuals who owe the most money are not the individuals who default on debt
  4. Most bachelor's degree recipients graduate with little to no debt
  5. Even if financial aid covers the whole tuition bill, many students borrow to cover living costs

Questions of the Day

  • Given those facts, why should borrowers be bailed out at taxpayer expense?
  • If they are, when will it stop?

Dead on Arrival

On November 29, I commented Biden's Progressive Agenda is Dead on Arrival .

The obvious implication is "DOA in Congress" as opposed to seriously misguided and dubiously legal executive orders. 

Compelling Case

HedgEye author Neil Howe makes a compelling case in Is A Student Debt Jubilee Coming?

Colleges possess such extraordinary pricing power in part because they bar or discourage new competitors and in part because lazy employers rely on a limited number of them to act as credential gate keepers. What federal policy ought to do is actively promote new types of educational institutions better fitted to employer needs and to promote measures by which families can fairly compare the value-added of different schools. Colleges and collegiate associations actively discourage all of the above.  

In sum, it's a mistake to enact a student debt jubilee without first rethinking and recasting the whole market for higher education. Otherwise, we’ll either end up right back where we started (with millions of new students crushed by huge debt loads) or somewhere we don’t want to go (with taxpayers committed to covering the cost of whatever colleges want to charge... a bit like they now do with healthcare providers).

Huge Moral Hazard 

Debt discharge is a huge moral hazard that encourages more overpaying for useless degrees.

It will do nothing to address the cost of higher education.

We need more competition, more accredited schools, more alternatives, and less public union graft. 

Forgiving debt fosters less competition and more graft.

Under Pressure

Biden is under pressure from Bernie Sanders and Elizabeth Warren who believe Biden could not have won without them.

This claim is off by 180 degrees.

Election Message

The fact of the matter is rightful fear of Progressives could have cost Biden the election.

You can see this in the House and Senate races. 

Trump lost but Biden had negative coattails. Why? 

Fear of exactly this kind of liberal agenda. 

Voters did not want Trump but they did not want liberal nonsense either. 

Message Not Heard!

Trump did not get the message. Neither did Biden nor the Progressive wing of the Democratic party. 

Biden is off to a bad start by listening to the Progressive wing that damn near cost him the election.

Mish

Comments (101)
No. 1-32
Eddie_T
Eddie_T

Unpayable student loans should be able to be discharged in bankruptcy court. We could fix that, but we probably won’t, because the donor class doesn’t want it.

In general, I think it’s a bad idea to discharge student debt...but in the short run it would be great for the economy.....talk about a stimulus.

I do think a $50K forgiveness makes more sense than a $10K forgiveness, because it would tend to benefit those who actually completed a degree rather than those who didn’t....and it would put a lot of money in the pockets of young families who are held back from being homes because of student debt.

PecuniaNonOlet
PecuniaNonOlet

Biden listens to the progressive wing because that is where the young people are just as why trump listens to bigoted boomers is because thats where they are today.

Most of the teens I know were all Bernie fans and only reluctantly supported Biden largely to get rid of trump. With a bunch of republicans leaving the rnc and joining with biden, it will create a whole lot of friction within the dnc. Where does the rnc go from here? Is it now the trump party?

The key issue is that this country needs more viable political parties that can compromise. So many commentors here, myself included, are not happy with either political party. We keep moving from the lesser evil each election but still end up with evil.

Dodge Demon
Dodge Demon

Hi Mish. Please compare cost of your tuition at U if I per credit hour to the present. Is it about 12x to 15x now? Probably worse at private colleges, which can’t use the shop-worn excuse about state funding decreases. Follow the money to the dogs that ain’t barking: the college administration staff. Presidents, Chancellors, Provosts, Deans Of Diversity, Deans Of Bathrooms, Deans Of Coloring Books and Comfort Dogs and so on.

KidHorn
KidHorn

Sallie Mae sells tranches of bonds by year and credit risk. Bonds are not individually owned. Rather you own a piece of the entire portfolio for a given calendar year. You can get a higher return at the risk of taking a bigger principal loss and vice versa. I'm not sure how forgiving $50k of debt can work from an administrative perspective. The FED can buy debt, but they can't buy individual loans. And if the FED isn't buying the debt, I don't see any way to finance this.

Jack Spratt
Jack Spratt

I wish they wouldn't say forgiving student loans. The debt is just being transferred to taxpayers. The colleges, I assume, will get their money owed almost immediately.

AnotherJoe
AnotherJoe

I really don't understand student loans well. Who holds the debt? The federal gov? The colleges? Banks? I'm hearing people having non-dischargeable loans with %8 interest (How is %8 justified?). If the loan is guaranty by the US how is %8 justified? Is the loan guaranty also for loans to go to private schools? (like Trump university?). So if I was Biden, I push to make college loans dischargeble in BK. I will also only guaranty loans for students going to accredited public colleges. What am I missing?

njbr
njbr

For a good background on student loan debt--see the Brookings link below.

You will note that the highest proportion a big debt amounts is from the students at for-profit schools, which are not public or private universities.

These for-profit schools have high pressure sales that over-promise and under-deliver on post-graduation jobs.

...The Website For Profit U claims that an associates degree awarded at a for-profit college may cost up to four times as much than a similar degree awarded at a comparable public university located in the same region, and bachelor’s degrees cost up to 20% more at for-profit colleges.

Supporters of the for-profit education sector are sure to make the argument that though degrees from for-profit institutions cost the student more, they make up for that differential in costing taxpayers less. This is only partially true. As this study shows by comparing data from the National Center for Education Statistics (NCES.ed.gov) taxpayer costs for an associate degree are almost $4,000 higher per student in the public sector than the for-profit sector. However, the statistics also suggest that the combined costs (student and taxpayer) are approximately $16,000 per student lower at community colleges compared to their for-profit counterparts. This means, on average an associate level degree at for-profit college will cost the student $20,000 more than the same degree earned at a community college. Though on average, still higher than the costs of public colleges and universities, private-nonprofits also cost much less than their for-profit counterparts.

The higher costs associated with for-profit colleges may be justifiable if the degrees earned translated to higher earnings; however, students at for-profit institutions default on their loans at rates staggeringly higher than those of public and private-nonprofit colleges and universities. According to For Profit U, 1 in 5 students (22.7%) from for-profit colleges default on their loans within 3 years of repayment. That is compared to 7.5% of students from private non-profit colleges and 11% of students from public institutions. This statistic could suggest a number of things: perhaps graduates could not find meaningful employment after graduation, or maybe the program didn’t lead to employment that would generate the kind of income the student was promised. Perhaps the higher tuition and fees simply caused the student to take on too great a debt to be reasonably repaid. A number of factors could contribute to this statistic, but one thing is for sure, having substantially higher default rates coupled with substantially higher net costs means the higher cost is not providing greater return on the student’s investment in their education.....

Corvinus
Corvinus

I guess Biden's Progressive Agenda is Not So Dead on Arrival, eh?

Rbm
Rbm

Want to see the cost of college drop. Take away the government backing of the loan.
Instead of wiping the debt away drop the backing of the loans that are out. Problem solved

Zardoz
Zardoz

Why not just allow bankruptcy to clear these... just like any other debt? Let the lenders eat it.

njbr
njbr

Student loan info

18% owe $5K or less
17% owe $5 to 10K
21% owe $10 to 20K
21% owe $20 to 40K
9% owe $40 to 60K
5% owe $60 to 80K
3% owe $80 to 100K
4% owe $100 to $200K
2% owe $200K+

That is, 86% of borrowers owe less than $60,000.00--and 14% owe more than $60,000.00

Given that a college degree results in a significant life-time advantage in earnings (perhaps $300K for 2 year degree, and $1 million for bachelors over a HS diploma), to what extent should pay-to-play apply?

Seems to me that a $50K forgiveness is a broad stroke solution to a non-problem. A discussion of the cost-benefit of free college is a different issue.

A portion of the debt over $60K is for degrees that will very greatly enhance the recipients future income--should their future wealth be subsidized by everyone else?

I would guess a better solution would be a lending limit based on potential future earnings with the lender at-risk for future defaults on inability to pay.

Casual_Observer
Casual_Observer

What's driving the need for degrees ? It is corporations who are making them mandatory. Microsoft is the only company I know that publicly stated they no longer consider degrees mandatory for any job they hire for. The truth is people are not looking at alternatives and want the "college experience". Most companies don't even look at if a degree is online or in person or what accreditation it was conferred by. I blame the parents as much as anyone else.

davebarnes2
davebarnes2

OK. Both sides can play "what aboutism". What about Fat Donnie from Queens' destruction of immigration?

LewisM
LewisM

Student loan reform should happen, and yes, it's annoying to those of us who paid off our student loans that some people might get their debt wiped away, but the fed has literally printed trillions of dollars and given it to the Goldman Sachs banker class and I see only a fraction of the handwringing about that wholesale theft.

Sechel
Sechel

The simpler answer for college debt is to empower bankruptcy judges to forgive and modify student debt in the same way they do other forms of debt. Also the U.S. needs to undo the The Bankruptcy Abuse Prevention and Consumer Protection Act. There needs to be more scrutiny of for profit schools which prey upon students and take advantage of student loans. Also just like with mortgages the forms need to make it abundantly clear what incomes and payment schedules will be required to pay back the debt. We need to remember that borowers are 17 years old, not eve old eough to vote, drink , smoke or carry some firearms but yet we assume they can shoot themselves in the foot with a poorly chosen student loan

TwisterTim
TwisterTim

I believe the IRS considers "forgiven" debt as income, so people end up paying tax on the discharged balances. Some of these balances may put student loan holders several tax brackets higher. There is no free lunch !!

Captain Ahab
Captain Ahab

Let's talk about how to actually fix higher education rather than how to waste money.
The problem is not student loans. It is lack of accountability and mismanagement in largely democrat-controlled intuitions (90% plus of faculty and administrators generally). We see the effects in irrelevant curricula and faculty hires, low admissions, standards, etc.

You do not fix systemic failure with a loan bailout. You hold the failing party responsible and reward success. Now, how to do this. If universities were required to be the guarantor for all student loans they accepted, what would happen? Go through the steps...

  1. Hire/retain/promote faculty who are capable of teaching what students need to get a job and be successful.
  2. Recruit students who have the capacity to graduate and get a job, and be successful.
  3. Offer degrees and develop curricula to achieve student success--able to get a job and pay back the loan are reasonable criteria.

What about those students who want to study Ancient Aramaic 101, hiring a distinguished professor of Astrology, or offering a degree in Alternative Sexuality, for example? With few job opportunities in these areas, only the best students are accepted. Others might be accepted, if the university can afford it.

Mish
Mish

Editor

Thanks to njbr for the Brookings article. I updated my post with "5 facts"

DodgeDemon asked about my tuition costs. I added that to my post as well.

Jojo
Jojo

Here's a better plan: Give $50k to every citizen over 21.

Rocky Raccoon
Rocky Raccoon

The federal government needs to get out of the education business and tuition prices would drop dramatically. They have done a good job of flooding the market with lots of paper and making this paper easy for kids with no to little credit to get thus turning them into professional debtors.

It's really evil.

RB2
RB2

What in God's good name did you expect???

truthseeker
truthseeker

All this progressive stuff is beginning to look a whole lot worse now since both Republican Senators in Georgia are for the first time trailing in the polls, so that socialism in America has a real shot here.

ZZR600
ZZR600

If debt is money, is not cancelling debt lead to deflation?

Tengen
Tengen

I still anticipate very little catering to progressives from Biden. The DNC feels more emboldened than they have in a long time. They shot down Bernie, Tulsi, and Yang in the primaries and still managed to take down Trump with a feeble old guy in the general election, threading the needle.

Biden's desire to bring in Neera Tanden is especially telling, since her whole career is based on shooting down Bernie types in the party. The administration is shaping up to be very establishment rather than progressive.

SunnyvaleCA
SunnyvaleCA

Is forgiving debt a one-time giveaway or will this usher in a defacto $50k per resident to spend at whatever "institution of higher learning" that they want? Given that various governments have already spent $100k+ per pupil from kindergarten to 12th grade, I could see some people just wanting to extend another $50k. The problem is that if that first $100k+ were well spent (effective) 1/2 of those finishing high school would be ready to be productive members of society and the 1/2 would be well prepared to breeze through college with a useful degree while collecting less debt.

Those talking about using conventional loan strategies have to remember that students fresh out of college have no assets. They can simply declare bankruptcy and be done with it. Giving away $50k of taxpayer money does not do anything to solve any problem except the immediate problem of people being in debt, mostly through their own unrealistic choices.

Webej
Webej

Amen!

Webej
Webej

Yes. And Biden was a big supporter, so he would need to reverse himelf.

I've said it before, but relatively accommodating bankruptcy laws (and a second chance) were one the great things about America, and, in fact, the meaning of the ‘liberty’ text inscribed on the Liberty Bell.

Christopher Moore
Christopher Moore

There is a simple fix for the student debt problem:

  1. End the government involvement in the student loan business, this has to be done first.
  2. Going forward all student loans would go through a private bank and would be dischargeable in bankruptcy.
  3. All outstanding government student loan balances would no longer have an interest rate attached to the dollar amount. You owe what you owe, nothing more.
  4. Any interest or fees paid up to this point would be credited and applied to the outstanding balance of the individuals loan, lowering the balance on said loan.
  5. I would consider some debt relief for the very venerable who didn't make it to graduation. Those who should never have gone to college couldn't complete their first year.

This would cause tuitions to collapse and becoming very deflationary, which should lead to colleges having to rein in cost.

This system isn't perfect, but I think it would work better than forgiving $50,000 per student.

vanderlyn
vanderlyn

if every other Ahole in our country can default and move on, why can't the young folks our old geezers hooked with loans when they were mere teens. screw the old geezers. they are the reason our empire is crumbling and so evil.

Rusty Nail
Rusty Nail

After hundreds of billions in bailouts to banks and corporations over the last decade, the moral hazard ship has already sailed. It's a fun intellectual parlor game to imagine the ideal economic system, but any bearing on reality is questionable at best. In the system we have, I would be happy to see students thrown a bone.

Eddie_T
Eddie_T

The new scam appears to be “coding school”....maybe it’s not a scam, but it is a new place to spend student loans. In the last couple of years it seems to be really hot around here.

I’d be interested in what some of you more tech-savvy guys think about that phenomenon....is it legitimate training.....and.....how many people sign up for it and pay....but maybe can’t hack the curriculum and drop out/


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