Among the demands of the Wall Street protesters is student debt forgiveness – a debt “jubilee.” Occupy Philly has a “Student Loan Jubilee Working Group,” and other groups are studying the issue. Commentators say debt forgiveness is impossible. Who would foot the bill? But there is one deep pocket that could pull it off – the Federal Reserve. In its first quantitative easing program (QE1), the Fed removed $1.3 trillion in toxic assets from the books of Wall Street banks. For QE4, it could remove $1 trillion in toxic debt from the backs of millions of students.
The economy would only be the better for it, as was shown by the GI Bill, which provided virtually free higher education for returning veterans, along with low-interest loans for housing and business. The GI Bill had a sevenfold return. It was one of the best investments Congress ever made.
There are arguments against a complete student debt write-off, including that it would reward private universities that are already charging too much and it would unfairly exclude other forms of debt from relief. But the point here is that it could be done and it (or some similar form of consumer “jubilee”) would represent a significant stimulus to the economy.
Toxic Student Debt: The Next “Black Swan”?
The Occupy Wall Street movement is heavily populated with students. Many without jobs, they are groaning under the impossible load of student debts that have been excluded from the usual consumer protections. A whole generation of young people has been seduced into debt peonage by the promise of better jobs if they invest in higher education, only to find that the jobs are not there when they graduate. If they default on their loans, lenders can now jack up interest rates and fees, garnish wages and destroy credit ratings; and the debts can no longer be discharged in bankruptcy.
Total US student debt has risen to $1 trillion – more than US credit card debt. Defaults are rising as well. According to Department of Education data, 8.8 percent of recipients of federal student loans defaulted in fiscal year 2010, up from 7 percent the previous year. With an anemic recovery from a severe recession and a difficult job market, the situation is expected to get worse. The threat of massive student loan defaults requiring another taxpayer bailout has been called a systemic risk as serious as the bank failures that brought the US economy to the brink of collapse in 2008. To prevent another disaster like the one caused by the toxic debts on the books of Wall Street banks, we need to defuse the student debt bomb before it blows. But how?
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