An Anchor, Not a Bubble: Student Loans and the New American Serfdom

Student loans are not like mortgages, for the simple reason that they are non-dischargeable in bankruptcy. They are not a bubble and cannot become one. What they can become is an anchor that is sinking the fortunes of an entire generation.
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The economic world, some would have it, has been awash in a sea of frothy bubbles for a couple of decades now. And there is some truth to this claim. The NASDAQ stock surge of the late 1990s was a bubble. The underlying valuations never justified the NASDAQ at 5,000 and despite all the relentless hype by the big brokerage firms, the bubble inevitably deflated. A few years later, residential real estate went through its own bust. "Homes never lose value," went the mantra. But the slicers and dicers of the securitization market exploited this false assurance, driving prices beyond the ability of home-owners to pay and the great crash followed.

In the last few years, talk of bubbles has migrated to all corners of the business world. But one place where such talk is certainly out of place is the student loan market. For sure, there are many who describe student loans as a bubble. Right-wing blogs have been fairly screaming this from the rooftops. Patrick Hedger, a policy analyst for FreedomWorks, thus writes that "Student Loans are the New Housing Bubble." Ben Gersten documents "The Scary Reality of the Student Loan Bubble in 5 Charts," But the bubble talk has also begun appearing in mainstream sources as well. See "Bankers Warn Fed of Farm, Student Loan Bubbles Echoing Subprime," here.

The claim that student loans are a bubble is mainly based on the exponential rise in borrowing in recent years, coupled with rising default rates. But this combination does not a bubble make. The NASDAQ deflated for the simple reason that stock markets are liquid. A stampede for the exits was inevitable and easy once the selling began. Real estate similarly deflated when prices reached unsustainable levels because in many jurisdictions it is easy for home owners to walk away from mortgage loans. When home owners could no longer refinance, when the balloon payments became unmanageable, when purchasers who might take the property off the distressed home owner's hands could no longer be found, prices came down like a leaden souffle.

Student loans, however, are not like this, for the simple reason that they are non-dischargeable in bankruptcy. They are not a bubble and cannot become one. What they can become -- and show increasing signs of actually becoming -- is an anchor that is sinking the fortunes of an entire generation.

Consider a recent story in U.S. News -- "Are Student Loans Ruining the Economy?" the author asks. The answer is a resounding "yes." There was a time, not too many years ago, when young people with student-loan debt were more likely to buy homes. Their incomes were high, their futures bright, and the debt load manageable. But that reality has now reversed. Those without student loans are now more likely to buy homes.

What this means now, in practice, is that homeownership among the young is shrinking and is increasingly class-based -- young people from wealthy, well-connected families who don't have to borrow heavily if at all to attend school can still buy homes, but the less affluent are squeezed to the sidelines. There is little wonder that record numbers of young people are living with their parents into their twenties and thirties, unable to marry, to have children, or start households of their own. Many young people today are unable even to purchase that traditional ticket to freedom and the open road, the automobile.

Congress has considered reform of the system, but most proposals are little better than tinkering at the edges. In 2012, Congressman Hansen Clarke, (D.-Mich), proposed a loan forgiveness program, but its ambitions were modest and its stimulative effects would have been negligible since its main provisions were to be implemented only ten years down the road. Senator Elizabeth Warren's proposal to cap interest rates at 0.75 % -- the rate that banks can borrow from the Federal Reserve -- is an interesting and important proposal. But this bill does not address the mountain of debt already accumulated.

The student loan crisis is rooted in a fundamental change in the way American higher education has been perceived in the United States. Historically, from the very creation of the Republic, higher education was seen as something beneficial to the nation as a whole. Thus George Washington called on Congress in 1796 to create a national university, sufficiently well-funded to attract "the ablest professors," and intended to promote "the different departments of liberal knowledge."

Two generations later, in 1862, Abraham Lincoln called on Congress to pass the Morrill Act, creating America's first land-grant colleges. Justin Smith Morrill, the Act's principal sponsor, defended a robust role for government in promoting knowledge. "[W]e shall have done something to enable the farmer to raise two blades of grass instead of one; something for every owner of land; something for all who desire to own land; something for cheap scientific education; something for every man who loves intelligence and not ignorance ... something to remove the last vestiges of pauperism from our land."

For much of the 20th century, Americans preserved this connection between higher education and the public good. Dwight Eisenhower praised Lincolns' commitment to higher education, and called upon America to do more because education "is vital to free government." In signing the Higher Education Act of 1965, President Lyndon Johnson invoked this long tradition and committed the federal government "to nourish human potential today, so that our Nation can realize its rich promise tomorrow."

In the last two decades or so, however, this long-standing American ideal, this commitment to higher education as a public value, this belief that an educated citizenry served not merely private interests but the good of the entire community, has been corroded by the individualist rhetoric of right-wing economists.

One can take the work of Richard Vedder as an example. Vedder argues that public support for higher education results in a host of evils -- price insensitivity on the part of consumers (i.e., students might attend a better college than they could otherwise afford); higher taxes (because we all know that the government which taxes least governs best); and the private enrichment of students who attend colleges and professional schools to increase their income potential (washed down the memory hole is any remembrance of the American commitment to the public values of a productive and informed citizenry).

Really, isn't it time to break free of these tired, threadbare neoconservative bromides? This iron triangle of political resentment -- and the claim that someone, somewhere is reaping a benefit at public expense is always a summons to resentment -- must be broken.

Nearly a year ago, in my first blog in The Huffington Post, I called for a year of jubilee for student loans. We need large-scale student-loan forgiveness even more today. Aggregate student-loan debt has broken the trillion dollar barrier. For too long, governments in thrall to the siren song that education is a purely private pursuit have had their way, making student loans non-dischargeable in bankruptcy, permitting interest to accrue even while students are in school, hiking interest rates to levels not justified by market forces.

It is time to recapture the vision of Washington and Lincoln, Eisenhower and LBJ. To those who say to heavily-indebted student borrowers, they should pay for what they bought, I answer back, at how steep a price? Is it worth it to extract every penny of compound interest from the young while sacrificing economic recovery? To crush the hopes and aspirations of a generation who cannot afford to form families of their own? To injure generations as yet unborn by frustrating the formation of new households? We have tried the neoconservative vision to our great detriment and it is time to pronounce it a failure.

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