Should the U.S. Government Bail Out Student Loan Holders to Stimulate the Economy?

Move over sub-prime borrowers, irresponsible lenders, and big banks … a new group is on the rise, looking for a bailout. Business Week ran a fascinating article last week about a New York attorney starting a grassroots Facebook movement to change the student loan landscape, highlighted by a push for the U.S. government to forgive student loans as a way to stimulate the economy.

The attorney in question is Robert Applebaum and he has started a Facebook group that now has more than 138,000 members and includes people who are now actively pushing for legislative reform regarding student loans. The name of the Facebook group pretty much spells out what Applebaum is going for: “Cancel Student Loan Debt to Stimulate the Economy.” The BW article goes on to cite examples of people shackled by student loan and then discusses some spin-off arguments, such as larger reform for the way student loans are handled relative to other debt (for instance, student loans can be part of a bankruptcy filing).

The thrust of this blog post is to examine Applebaum’s idea and analyze the merits of such a proposal. Assuming this Facebook group continues to grow and this movement continues to take hold (and maybe it can, especially given how vocal both Barack and Michelle Obama have been about their own student loans), is it a good idea?

First, let’s acknowledge that the bulk of the people within the Veritas Prep community — employees at our headquarters, admissions consultants, GMAT instructors, and clients — have or will have student loan debt. Much of it will be from graduate school and much of it will be for a fairly hefty amount. So this is a community that would benefit from a student loan “bailout.” That, of course, is not reason enough to justify such an action by the government.

There are, however, two substantial questions to ask about this group as a whole that might allow us to better understand whether such a proposal has merit:

1. Is this a group that is more deserving than others of a bailout? Part of the reason that Applebaum launched this Facebook group is that he was frustrated to read stories like the infamous office remodel and other abuses of bailout money. Many others with student loan debt are tired of seeing people walk away from homes they can’t afford, only to get bailed out by the government. There is a feeling of unfairness that cleaves student loan debt from virtually all other forms of debt at this time. You can’t run from it, you can’t get a bailout … you are stuck with it.

And yet from a young age, students are told to think of student loans as an investment. They are indeed encouraged to take out loans to pay for an education. And while some programs (particularly law schools) have loan forgiveness programs for people who take jobs in the public sector or with non-profit organizations, there is no denying that the ROI can be hard to calculate prior to making this “investment.” This is especially true for a 17-year old going to college, but is also true of graduate students who don’t know what their exact career path (and earnings) will look like.

Certainly, a person could look for and find — with relative ease — examples of people who made bad investments in education. Students can make poor choices and attend schools they can’t afford by paying entirely through loans. If they do this twice — with undergraduate and graduate school — the problem is compounded. So the “student loan” population is certainly not without flaws. However, an easy argument could be made that taken as a whole, the entire population of people with student loan debt is a more “deserving” group than the population of people who are underwater on their houses. Or the population of lenders who handed out sub-prime loans to unqualified borrowers. Or the rating agencies. Or the banks. And so on. The student loan population, as a whole, has not made any egregious decisions or done anything that we find reprehensible in retrospect.

Therefore, it can probably be safely argued that this indeed a more deserving group of people to receive debt forgiveness and if the government is going to bail anyone out, it should be holders of student loan debt (we’ll leave the arguments related to amounts or classifications for another day).

2. Would forgiving student loans actually stimulate the economy? Of course, even if we deem the student loan population more worthy of a bailout, there is a second aspect to consider, which is whether loan forgiveness would work. On the surface, the answer would seem to be yes. By freeing a large group of people from the burden of paying off loans, there would suddenly be more disposable income in the hands of all kinds of individuals, from varying classes and locations. A simple hypothesis would go like this: free people from student loan debt and now they can afford their mortgage payments. Or: free them from student loan debt and now they can spend more money on goods and services. There is no doubt that lifting a debt obligation from such a large group of people would free up cash that work as an infusion into the economy.

That said, there are problems with this simple approach. The first is whether the student loan population — and the amount of debt held by each individual within that group — is significant enough. Is there a big enough cross-section of student loan holders that can’t afford their mortgages, but suddenly would be able to? If so, you can bailout student loan holders and still help homeowners. Do student loan holders pay so much each month that their lives would become radically different if that burden was lifted? Certainly, in some cases. But there are other cases were individuals purposefully continue paying off their student loans for years, even after they are wealthy. So a universal bailout might not stimulate much activity from a portion of that group. Finally, are there even more deserving groups out there? Are there better ideas? Would a proposal to give home owners a tax deduction for any losses they take on selling homes be a much better accelerator for the buying and selling of homes? The answers to these questions are unclear and make what seems like a perfectly great idea fraught with complications.

All told, a decision to bailout student loans would certainly help a lot of people (this author included). It would feel “fair and just” to many. And there is no doubt that it would stimulate the economy at least to some degree. However, it is unclear whether it would make a big enough dent and solve enough corollary problems, or even if this the right approach. It is a fascinating idea and if nothing else, Robert Applebaum’s proposal is getting people talking about student loans and how they work in the big picture, which is necessary. But would it really work, in the way that we need it to? That’s hardly clear.

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Photo courtesy of borman818, under a Creative Commons License.

5 Responses

  1. L says:

    please please please god let this happen…I make $12.02 an hour and pay a $600 student loan bill monthy…needless to say I'm barely making ends meet

  2. I am very intrigued by this concept – I will go research further. Thank you! Alicia

  3. jjomalley1 says:

    How good would this be? I am a single grandmother will sole custody of my eight year old grandson. This was of course,not planned.I was required by New York State, when I relocated here, to attain a Masters degree in order to keep my teachers license.Now I am paying back 51k student loan debt with only a 2600.00 a year salary increase. But my neighbor is walking away fromhis mortgage and starting with an essentially clean slate. fair? I think not.

  4. Chick 1 says:

    I have been begging for this to happen. I too pay $600 a month in school loans. I make pretty good money, but I can never buy a house or anything because I've had to charge stuff (I am a single mom) so now I owe a ton in credit cards too. I don't think I should get a free ride, but I'm also locked into a 7.25% loan because I was tricked into consolidating (another long story). I cannot get a lower rate. EVER. I will be paying my loan still when my daughter starts college. This thought just sickens me because I won't be able to help her. My school promised that 99% of their alumni got great paying jobs. Yea.. it took me literally 10 years to find a job (and I still don't even know if I'll have it next year in Q1) *sob*

  5. Anastasia says:

    I have been graduated for about a little over a year now. I pay about $1000/month b/c there is no consolidation anymore. I would absolutely be purchasing a house if I had no student loans. I bought a new car earlier this year, and I would be spending a lot more money if I didn't have such a large student loan burden. We are the population that holds the key to economic stimulation. We have the most necessity for purchasing houses and cars and establishing our lives on our own at this point. At this rate, I will be living at home until I am married, b/c I refuse to rent. Give it to the people who actually can make a difference! Or at least take SOME of it away from us…

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