West News Wire: On Sunday, President Joe Biden tweeted, “It is essential to assist deserving borrowers in recovering from the financial effects of the pandemic by providing student loan debt relief. I campaigned to retain it in place in our bipartisan budget agreement because of this.
People thanked Biden for assisting them or, alternately, criticised him for handing handouts to adults who ought to be more financially responsible in the typical politicised remarks that followed.
That is really common and in line with what you could anticipate in relation to the US student loan debate. But it’s misleading, which is the issue. Only a limited $6 million programme for loan forgiveness is included in the so-called Fiscal Responsibility Act of 2023 for a subset of qualified people. Meanwhile payments will resume for the vast majority of borrowers and the $1.78 trillion they owe 60 days after June 30, following a three-year-long emergency freeze because of the Covid-19 pandemic. As The Debt Collective describes, this was lauded by one of the most predatory lenders, SoFi, to the point that they dropped their lawsuit against the US Department of Education.
In effect, Biden gave a win to big financial institutions while forgiving roughly 0.0000034% of the country’s total student debt. You may be thinking to yourself, as some folks who commented on Biden’s tweet, that borrowers should resume their payments since they signed for the loans and ought to pay them like proper adults. Discounting the fact that most developed countries have taxpayer-funded higher education and therefore student debt isn’t a major problem, this is detrimental to the US and global economy.
You might also believe that Biden’s programme, which would forgive up to $20,000 in debt for many federal loan debtors, could create a systemic risk and that people not making their debt payments would be harmful for the economy. First off, this is instantly refuted by the fact that people haven’t been making their monthly payments for more than three years. Furthermore, this way of thinking downplays how fundamentally flawed and dishonest the US financial system is.
The crucial fact is that most borrowers couldn’t repay their student loans anyway because of the high cost of living in the US, rising rents, and surging inflation. In November of last year, a Morning Consult survey indicated that 59% of borrowers wouldn’t be able to afford their payments when the federal student debt freeze is lifted, meaning they could default on their loans. And even people like the aforementioned Debt Collective are organizing to orchestrate a student debt strike.
Therefore, it’s not an issue of whether people should or shouldn’t pay their loans, many just can’t. The problem with this, for the broader financial market, is that the financial market trades, as it has for decades, what’s called Student Loan Backed Securities (SLABS). These are a kind of security that is collateralized by student loans, meaning investors are essentially gambling on whether people can pay their loans or not. Since most people have student loans backed by the federal government, forgiving them would not create any kind of systemic risk for the financial market in this way.
About 3.6 million people have private debts, which are the main issue. These specific debts have interest accruing in forbearance even if the payments have been halted. Most people whose payments have been frozen haven’t made them, so when the freeze expires at the end of August, their payments will be more onerous because they now owe more than they did before. Due to SLABS, there is a significant chance that borrowers of private loans may fail, which would have a domino effect on the market.
This situation is comparable to the financial crisis of 2008. Mortgage-backed securities, which were then securitized, encouraged excessive risk-taking in a financially sector that was already very loosely regulated. When the housing market bubble burst and folks defaulted on their mortgages, Wall Street investors were left holding the bag on these mortgage-backed securities and it spiraled from there, wrecking the global economy.
To be fair, SLABS have fallen from the market in recent years as the freeze has been in effect. But they could become more popular again and, more importantly, smart investors will probably short them based on the data that clearly indicates many borrowers will default, which is a major problem. Wall Street investors shorting major financial institutions have been instrumental in some of the largest banking crashes in US history in recent months, and they were equally important in fueling the 2008 financial crash too.
This, of course, has nothing to do with any personal moral failings by individual investors but rather a failure of the federal government to foresee this possibility and regulate what kind of securities can be traded. Other countries and blocs, like the EU and China, surely have risky financial products such as mortgage-backed securities but they are far more regulated and nowhere near as developed as in the US. The US stands alone in dealing with SLABS, both because of its lack of universal higher education and its lax financial environment.
The ‘be an adult’ argument, frequently levelled at student loan debtors, could easily be applied to investors as well: You took a risk by making an unrepayable loan, so you should deal with the repercussions. That’s a lovely “gotcha,” but it does nothing to lessen the economic impact of a systemic financial market problem. The Biden administration really needs a solution for the problem that many investors will sensibly bet against these private loans that are almost guaranteed to default in addition to provide some explanation to private loan holders and it appears that the Department of Education has none at all.
This probably won’t happen based on what we can see with the Fed and the administration’s whack-a-mole approach to large bank crashes. Their non-existent solutions to a very obvious commercial real estate bubble in an impending death spiral, and Biden being the perennial friend of creditors are also clear.
Finally, as far as the federal student loan forgiveness program Biden has put on the table, it is almost certain the Supreme Court will unload every bit of legal revisionism and corporate activist jurisprudence at it. And his track record heavily implies he would support this.
