Bernie Sanders has no clue how student loans work

This is not a post about politics. This is a post about basic economics. I really don’t care about your politics.

First of all, let’s talk about where student loans come from and how financial bubbles are created. We can all agree that younger generations are getting absolutely fucking screwed when it comes to obtaining an education. But not everyone who believes this understands the mechanics. And that leads them to support objectively insane public policy positions.

Wall Street is responsible for many yards of bullshit, but they are not even remotely responsible for the student loan crisis. Two other forces in American society are: (1) the federal Department of Education, and (2) postsecondary institutions with bloated administrations and ridiculously lavish capital construction programs.

In the immediate wake of the financial crisis, a lot of legislation was passed, among it the Affordable Care Act (colloquially known as Obamacare). The ACA did not just pertain to health care, however. It was what is known in government as a “Christmas tree,” as lawmakers’ and lobbyists’ every desire was dangled from it. This included higher education. A significant provision of that legislation was that the federal government assumed responsibility for substantially all student lending in the country. The federal government actually took over the books of a lot of state-operated nonprofits, which were far more generous than the federal government in terms of servicing loans and turned a lot of their own investment profits into loan relief.

Student loans do not materialize from nowhere. Someone has to provide the funds. To make funds available for student borrowers, the US federal government issues Treasury bonds, which is essentially borrowing a ton of money from places like China and Japan. (And Wall Street! The federal government relies on borrowing money from Wall Street to cash flow.) US taxpayers borrow that money, and the proceeds from those loans are then turned into loans to student borrowers. Make no mistake: These are very generous, taxpayer-subsidized loans. If you walked into Bank of America as an 18-year-old and told the loan officer that you wanted a low interest rate loan for $50,000 with zero regard for your credit history or employment or future earnings, so you could study accounting or philosophy or religion or gender studies, and please pay for your housing and meal plan while they are at it, Bank of America – a Wall Street institution – would laugh you out of the bank. Because to them you are an objectively bad bet on loan performance. And they are not wrong. Most of the student borrowers that have taken out such loans have either defaulted or are in one of the federal government’s very generous forbearance programs (forbearance means you aren’t paying, but the government’s loan servicer is agreeing not to destroy your life just yet). Because their earnings do not match the cost of their education. If they did, there would be no problem here.

So if the federal government suddenly decides to tell you that you do not have to repay your loan, what happens to those Treasury bonds that the government issued to borrow money from China and Japan to fund your education? Nothing. Nothing at all. American taxpayers must still repay those funds at the barrel of a gun (or, let’s be honest, in the path of a nuke). The federal government would never entertain the idea of not returning $2 trillion plus interest to China. That is the stuff of world wars and not the silly swatting at unmanned drones that is happening these days.

Enter Bernie Sanders’ “financial transaction tax,” which Bernie Sanders says will tax Wall Street to pay for the education you received. Bracket off the fact that, again, the federal government makes student loans and not Wall Street. He instead is going to tax a fixed percentage of stock, bond, and *gasp* derivative transactions.

Bernie Sanders is either colossally stupid, or he wants to buy votes and he’s betting that younger generations do not understand a few things: (1) that the people who participate in the financial markets are not an exclusive group of Gatsby-esque assholes in New York, but every person in the US who has set away money for retirement, for their kids’ education, for a down payment on a new home, or pretty much anything that requires saving; (2) that “derivatives” are not just interest rate swaps used to manage portfolios of mortgages and other financial products, but also the options that are used to mitigate risk in, say, the mutual and index funds that almost every American owns, (3) that there’s not going to be fat cats rolling over and accepting the political resistance affecting their bottom line, but that a financial transaction tax is actually a TAX ON CONSUMERS. It’s regressive, not progressive. It hurts the little guy more than the big guy as a matter of fact, not theory. And even the transactions that are institutional, like interest rate swaps used to hedge mortgages, will only make financial products more expensive to consumers, as the cost of hedging the risk will just be passed on to consumers in higher lending fees.

His plan might help the sliver of younger generations who (1) borrowed an epic ton of money for an education they cannot use, and (2) have no income / are trying to fend for themselves in one of the US cities that is experiencing a massive real estate bubble right now (which the federal government is also propping up – noticing a pattern?). But it’s going to be a wash for the people who borrowed within their means and while experiencing loan forgiveness are going to see its long-term impact on their savings. Only Washington can take your money to give you money back and think you’ll be delighted with that outcome. Because they think you are an idiot pawn, and for a lot of people they aren’t wrong.

Which brings us to the other culprits in this situation: universities. It’s not an accident that a young adult in the 1960s (Bernie’s generation) could afford college by working during the summer while younger generations now have educations that cost a quarter of a million dollars and compete with mortgages for their chunk of the American Dream.

College administrators understand this one important point: That young adults can borrow virtually unlimited money from the federal government (ultimately from China and Japan) to pay for their education, and this means that colleges can charge virtually unlimited amounts for an education. The dynamic here is not at all that different than the liar loans of the mortgage crisis and the financial bubble that ensued. Bankers understood that if they were originating mortgages to sell to investors and not holding them on their books, they could lend virtually unlimited amounts of money with no concern over whether the debt could be repaid. Same with colleges. They have no skin in the game financially.

Higher education is an antisocial enterprise now, and they have created a debt-fueled financial bubble in higher education. They sell the idea that younger generations will be ruining their future financial lives if they choose to do something that does not require a degree, but after you buy a degree from them, your financial life is immediately ruined. They’ve turned college into a second infancy, with luxury suites and student centers with rock walls and restaurants – just some warped hyper-materialistic perversion of education in the place of building skills and making an effort at job placement.

The federal government does not have to absorb trillions of dollars in cost now (and pass those costs on to consumers) and trillions of dollars going forward (who knows where those funds will come from) to break this miserable cycle. They can demand that colleges have financial skin in the game for the graduates they have released into the world to fail. They can strip colleges and universities of their nonprofit status and start clawing back some of these multi-billion-dollar endowments that universities hoard while bankrupting their raison d’etre.

This dynamic needs to change by holding the people who are actually responsible responsible. Not by milking narratives of resentment from 2008 that have literally nothing to do with the problem.

What Bernie Sanders is proposing is just going to enrich the people responsible yet again.

2 thoughts on “Bernie Sanders has no clue how student loans work

  1. I learn a lot from you. It just shocks me how many people don’t understand where Student Loans come from and also they still choose to go into debt. Thankfully my 35k of student loan is gone because I PAID IT OFF my self!! We are becoming a seriously stupid country.

    Liked by 1 person

  2. Thanks for explaining how this all fits together. I went to college in the 70’s/80’s, as you say, by working in the summers but also 20 hours per week in the work-study program. As upper division courses got more intense, I left work-study and took student loans at $2500 per year, but got out with only $10,000 debt. The Army paid it off for me at one third per year for three years. But now I’m struggling over our son wanting to start school next year and I don’t have the money for it.

    Liked by 1 person

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