When is a student loan not a student loan?
When the federal government turns it into a moral hazard.
Biden and company say, Hey, we’ve got an idea! Let’s make people who scrimped and saved and sacrificed and paid off their student loans pay off the loans of others! Or better yet, people who never went to college at all should pay off the loans of those who did! And let’s just do it by executive order.
My, what a novel and nifty idea. What could possibly go wrong?
Also, the COVID emergency is invoked as a reason Biden can do this under a 2003 law involving emergency powers. That’s a classic move when a leader wants to expand powers. Not long ago people like Nancy Pelosi and DOJ lawyers were saying that such a thing couldn’t be done through executive action. Well, guess what? Now it can:
For the past year and a half, the Office of General Counsel (“OGC”), in consultation with our colleagues at the Department of Justice Office of Legal Counsel, has conducted a review of the Secretary’s legal authority to cancel student debt on a categorical basis. This review has included assessing the analysis outlined in a publicly disseminated January 2021 memorandum signed by a former Principal Deputy General Counsel. As detailed below, we have determined that the Higher Education Relief Opportunities for Students (“HEROES”) Act of 2003 grants the Secretary authority that could be used to effectuate a program of targeted loan cancellation directed at addressing the financial harms of the COVID-19 pandemic. We have thus determined that the January 2021 memorandum was substantively incorrect in its conclusions.
Fancy that. How convenient.
And since Biden’s specialty seems to be the odd and condescendingly racist comment, we have this from Joe, too:
The burden is especially heavy on Black and Hispanic borrowers, who on average have less family wealth to pay for it. They don’t own their homes to borrow against to be able to pay for college.
But that’s okay. It’s only Biden and one of his endearing gaffes again.
The Babylon Bee has this to say.
NOTE: I think “moral hazard” is the right term, but those of you who are more conversant with economics that I might be able to say whether it’s actually apropos or not.
ADDENDUM: I see that the WSJ agrees that it’s a moral hazard: “Worse than the cost is the moral hazard and awful precedent this sets.”
Not everyone realizes that a long time ago the Federal government took over the guaranteed student loan business. When I went to college, the student loan was through a bank, and once you graduated Sallie Mae bought the loan and you paid Sallie Mae. Since 2010 the banks are cut out, the student loan is directly from the Department of Education.
The direct loan program is holding about $1.5 trillion in student debt. If the government does not collect this money, they have to raise taxes or borrow other money to make it up…
I must check with my black neighbors on my evening walk, to tell them that they don’t actually own their homes.
Ah the irony, today’s woke condemn the actions of prior generations. Hypocritically supporting actions today for which future generations will curse them.
Which actually doubles the irony, if today’s woke succeed in fundamentally transforming America, they will have created upon the ashes of that former America an unjust beginning themselves. Making likely that future generations will tear down the statues that today’s woke erect.
For the last 2 days I’ve been engaged in the usual FB argument on the college loans. Also as usual I’ve been attacked as an uncaring troglydite. This afternoon, after I gave many examples of the increased costs of higher Ed, being due to the exponential increase of administrative costs, I was called “uneducated “. Apparently only an uneducated person would make such a claim. Of course my 45 years as a professor who fought with the administration as their budgets went up by 200% while the academic budget was flat, and even decreasing after inflation carried no weight. I’ll keep fighting, but these people are deranged but make up half of the population. We are so screwed.
I think it was already ordained as a future gift, reserved for times of urgent need. I think most people always suspected that once the Federal Government took over the student loans, they would eventually become politically useful.
“By cutting out the middleman, we’ll save the American taxpayers $68 billion in the coming years,” the President said. “That’s real money – real savings that we’ll reinvest to help improve the quality of higher education and make it more affordable.”
– Barack Obama, March 30 2010 – Telling Americans how good at least some of us will have it – Upon signing into legislation the Federal Takeover of Student Loans in the US: Health Care and Education Reconciliation Act of 2010.
And now the Gifts of Future Past have arrived. Of course, it’s more like $500 billion now – to be “savings” for the folks that prefer not to pay back their financial commitments. And to be paid, instead, by the rest of the chumps.
physicsguy:
You’re un-REeducated.
Fraudulently elected Raphael Warnock states, “I’m going to keep fighting for additional student relief for all Georgians left struggling with student debt and to prevent future borrowers from carrying that same burden,”
Translation: Democrats plan to make taxpayers pay for college indoctrination. Like “gender studies” where graduates can go on to taxpayer funded federal jobs and ‘consultant’ gigs for corporate indoctrination of employees, where the raising of prices of consumer goods and services pays for that corporate indoctrination…
Yes it is a moral hazard. But they took care of that too. Future payments are capped at 5% of income, and all owed money is forgiven after 10 years. No word on reparations for those who paid off their loans previously. Some people have all the luck.
Frederick,
The original concept of the federally guaranteed student loan, as I understand it, had the Feds provided up to a 50% of principle guarantee in the case of a default. This way the banks and their loan officers were still well motivated to ensure that the vast majority of loans would be paying loans. Skin in the game.
I am aware of Sallie Mae but don’t know the fine points. I’m sure some banks during the credit bust of 2008 thought that the Fannie and Freddie bought those loans and they had to deal with those defaults. The reality in that case was the attitude “We’re from the gov. and we make up the rules as we go.” Many or most of those bad home loans got pushed back onto the banks.
18-year-olds who didn’t/don’t know what they were/are doing financially, who had/have no clue about the volume of debt they were/are signing up for — and no clue of the financial consequences . . .
have no business getting to vote.
It’s time for only those who have paid income taxes for five or more years to get to vote.
Sez mee.
I’m with you Kate. Two neighbors across the street paid for the college education by joining the Navy. Then again, I doubt they planned on voting for Biden, so why would Biden do anything for them.
This sounds very close to standard “moral hazard.”
If I am looking for a distinction there is one obvious one. Normally the hazard is the failure to repay the principal. A bond holder lends his/her hard earned money out with the strong expectation of a full repayment.
Here, the lender, the Feds., are saying “No, no. We don’t really care if you pay it all back.” The irony is the question, who is the real lender here? The Feds. confiscate tons of money from taxpayers, but it’s not enough so they borrow tons more through the Treasury markets. To some extent, the Feds. are intermediaries for the Treasury bond and note holders. I assure you, they want their principal paid back.
Standard & Poors caused quite a stink many years back (2009 or 2010?) when they lowered the Treasury market credit rating below AAA.
The “moral” part of the issue? Why should students care about paying loans back if the lender doesn’t? Well, if you are paying attention, “Those lenders are from the gov. and they make up the rules as they go.” Don’t be beholden to those folks.
And don’t forget the ones getting screwed who served in the military to pay for their education.
When my son finished grad school during the height of the Iran/Iraq wars, the Army was offering up to $60,000 in student loan repayment (to join as enlisted not officer). In order to pay off significant student loan debt he joined and served 3 years, including a tour in Afghanistan driving an MRAP in Kandahar Province on convoy security. Now he like rest of us gets to help pay for somebody else’s Gender Studies degree.
Clearly this is a move that rewards Biden’s base of college graduates to fire them up for the midterm elections. It will also, to an unclear extent, piss off the non-college educated, working class, and conservatives.
So what’s the net? Is it a smart move or desperate?
I’m seeing a lot of coverage about how the midterms are looking better for Democrats because of the Roe/Dobbs decision and the Trump raid. Which is sorta plausible, but given the lockstep media stories I wonder how much of that is more gaslighting.
Inflation is still nasty and likely getting worse. Then there’s all the BLM/Antifa/CRT/trans crazy which has been lately eclipsed, but hasn’t gone away either.
Just another reason, I guess, to double (triple?) the number IRS agents.
And arm them.
Heavily.
Wouldn’t want any DEPLORABLE objecting to helping the guv’mint help all those students help get a start on life. (And vote Democrat!)
Makes sense to me.
Wouldn’t it be great is colleges would provide info to students on college finances,so that applicants could decide how much of a loan they wanted to take out. Provide the number of teaching faculty, the number of administrative employees and what they do, and a description of the living facilities on campuses. They could also describe the different departments and majors.
Applicants with brains could then decide how much of a loan the wanted to take out to pay for gender and ethnic studies departments.
And the next step:
“Biden Tries Again to Legalize Illegal Aliens Without Congressional Authorization”—
https://pjmedia.com/news-and-politics/rick-moran/2022/08/25/biden-tries-again-to-legalize-illegal-aliens-without-congressional-authorization-n1624119
But of course….
Tommy Jay @ 6:35pm
Yes the Fed wants to be paid back. But at what value. Their mandate includes keeping inflation at 2%. If there are periods where inflation is below 2%, they will allow higher inflation over time to average out. So what’s the difference to 2 years at 10% inflation vs. 7 years at 3%?
It looks like the government has chosen inflation as a strategy, based on the continued spending up front, vs. the taxes they supposedly will collect later. Biden’s newest $600 billion giveaway is just more stimulus– remember they’re now bragging they cut the deficit $1.7 trillion this year. If the current inflation was caused by the deluge of dollars the last couple of years, inflation will abate and we’ll be right back to recession.
The real tell will be if the Fed continues to raise rates.
Correction- Iraq/Afghanistan wars.
When is a door not a door?
When it’s ajar.
___________________________
(neo’s topic titles often rhyme with things I remember and I wonder if that old riddle was an input to her title.)
huxley:
Yes, absolutely.
Sorry Brian E,
I was using “Feds.” as shorthand for Federal Government, not the Federal Reserve or “Fed”.
Arguably, the student lenders in the federal gov. aren’t interested in full repayment at this point in Joe Biden’s messed up administration.
I’ve always wondered where the Fed got its 2% inflation target. I don’t think it came from legislation, but I’m not sure.
neo:
Thanks for clearing that up…
Now I wonder how many Gen X, Millenials or Zoomers would get that riddle. Even Boomers, I suppose.
One might as well be quoting Chaucer as to using “ajar” in a sentence.
The Fed mandates came from the Federal Reserve Act of 1977 which established the dual mandate of maximum employment, stable prices, and moderate long-term interest rates. Stable prices and moderate long-term interest rates are considered parts of the second mandate and targeting inflation at 2%, set in 2012, is how they approach maintaining a stable economy.
I thought you were referring to the Feds as the Federal Reserve, since their balance sheet is now up to $9.4 trillion.
Brian E,
Set by legislation in 2012? Or by Federal Reserve edict? I thought I had heard about the 2% target well before 2012.
So what’s the net? Is [Biden’s debt forgiveness] a smart move or desperate?
My question is not rhetorical. I’m curious what people here think.
Anyone paying attention (I don’t expect it) knows that I believe the Democrats have way overreached. I read great desperation into current Democrat moves.
My read is that we are seeing the Tet Offensive in the Vietnam War (1968). Rationally the North Vietnamese were doomed, but by this audacious counter-stroke they persuaded Walter Cronkite and anyone on the other end of his microphone that the Vietnam War had irrevocably failed.
What do you think?
By the FOMC.
They talk about the origins of the 2% figure.
https://www.stlouisfed.org/open-vault/2019/january/fed-inflation-target-2-percent
Brian E,
I was just reading that. This was interesting too. The Kiwis and Janet Yellen were pushing the concept starting in 1989 through the 90’s.
Adding to the prophetic quotes, Yellen said in 1996:
“A little inflation permits real interest rates to become negative on the rare occasions when required to counter a recession. This could be important.”
huxley,
Tet offensive. Interesting comparison. I’m not sure, to answer your question. I’m still trying to wrap my head around it all. To wit:
People are costing the program(? edict?) at around $330B to $500B. That seems high given that only $10K is being forgiven, though it is $20K for Pell grants. I confess to being pessimistic when it comes to things like this. About 1 minute after Obama announced his Federal takeover of student lending I expected full debt forgiveness eventually. Hey, it’s only $1.7T (correct?)! We may get there yet.
Steve Scalise had an interesting historical take on it. He said the claimed motivation for Obama’s takeover was finding the money to pay for Obamacare. I do definitely recall Obama repeatedly mentioning the cost savings to the loan program, but didn’t remember a connection to paying for Obamacare.
So the original plan was a big cost savings. The Fed. gov. was paying some of the loan interest to the banks which went to zero in the Federal takeover. But both the current interest payments being suspended during covid and now the debt forgiveness has turned that supposed savings into a big loss. What a surprise.
I don’t see how people can escape the obvious point that this stuff is inevitable when you turn children loose in a candy store. But they will not see it.
Ten or fifteen years ago CA had a big temporary income tax increase. They claimed it would only last until the big budget hole was fixed. Now the CA coffers are so full they are throwing money everywhere, and nary a peep is heard about that supposedly temporary tax increase. Nobody cares, especially if they are not impacted directly.
Someone suggested today that no one will make payments on student loans now. Maybe if that happened there will be some reflection on these actions, but I doubt it. I suspect most will make payments on their loans too, but will enough of them?
______
I think the maneuver does smack of desperation, but I think it will work (positively for Dems) a little, and only a little. I really wish the unconstitutionality would matter greatly, but it won’t. The SCOTUS may weigh in, but it will be mostly too late. It could help the Dems hold the Senate, and that’s about it. That’s a lot actually.
Huxley: “One might as well be quoting Chaucer as to using “ajar” in a sentence.”
I’ll try, here goes: “When that April with his shoures soote, the drought of March hath perced to the roote and bathed every veine in swich liquor of vertu engendred is the flour . . .”
Okay, maybe my Middle English spelling is off; but that is courtesy of a self-paid graduate school education. Foolish me spent my own hard-earned money when I could have had others pay for me.
But, there’s still hope – maybe, someday, I could get others to pay my mortgage?! I still owe over $150,000. Are you listening Brandon? Don’t you want my vote?
@ TommyJay > “People are costing the program(? edict?)”
I’ve called it the King Brandon Student Loan Decree, since he did it all with his (quill) pen, and didn’t even use his phone.
To answer the question in the headline:
When is a student loan not a loan?
When it’s a freebie.
Kind of like:
When is an Obamacare penalty not a penalty?
When it’s a tax.
Anyone looking to the Supreme Court for help (“when it’s too late” – TJ) should remember that Roberts is still the Chief Justice.
https://aclj.org/obamacare/supreme-court-rewrites-obamacare-allows-huge-tax-increases
@ Frederick > “The direct loan program is holding about $1.5 trillion in student debt. If the government does not collect this money, they have to raise taxes or borrow other money to make it up…”
Some people have no clue where the government gets money.
https://twitter.com/RachelPopp7/status/1562167036285009922
“Forgiveness means cancellation of loans. It does not come out of the federal budget. No one pays for it via taxes. Stop with the lies.”
@ TommyJay > “The irony is the question, who is the real lender here? The Feds. confiscate tons of money from taxpayers, but it’s not enough so they borrow tons more through the Treasury markets.”
I meant to add that to the above comment about the Twit.
@ Chris B > “When my son finished grad school during the height of the Iran/Iraq wars, the Army was offering up to $60,000 in student loan repayment (to join as enlisted not officer). In order to pay off significant student loan debt he joined and served 3 years…Now he like rest of us gets to help pay for somebody else’s Gender Studies degree.”
Some of those who joined up for the bonus didn’t get to make use of either the debt repayment or their degree.
King Brandon spits on their graves.
Stephen Kruiser pinpoints the way that the Democrats use language to mislead their Twits, like the one I quoted above.
https://pjmedia.com/columns/stephen-kruiser/2022/08/25/the-morning-briefing-village-idiot-biden-puts-another-nail-in-americas-coffin-n1624019
AesopFan,
RachelPopp7. Just wow. One of the children in the candy store.
There are additional elements to his proposal.
“The proposed plan would require borrowers to pay no more than 5% of their “discretionary” income on undergraduate loans, as opposed to the current 10% standard.
It would also raise the amount that is considered non-discretionary income, so that if you earn under 225% of the federal poverty line, you won’t have a monthly payment until your income increases that threshold.
And if you owe less than $12,000, your balance would be forgiven after 10 years of paying instead of 20, among other proposals.”— From Moneywise
Whether the effect will be positive or not, I perused the comments from the article I quoted and most were negative to the idea of this $300-800 billion giveaway.
This is an unusual solution.
He might even be serious.
https://www.israelnationalnews.com/news/358725
This writer has a great idea for Biden, one that will have him gain college student votes but will not cost him or us a penny. Op-ed.
Dr. Avi Perry Aug 25, 2022
Dare we say, this is the voice of reason?
https://reason.com/2022/08/24/biden-student-loan-debt-forgiveness-cancel/?utm_medium=email
And there’s an odd thing about those who did “fall prey” to the college education scam.
They seem to be working for the Biden administration.
https://www.realclearpolitics.com/articles/2022/08/25/_biden_student_loan_amnesty_a_windfall_for_dc_staffers_148099.html
Okay, we have a winner.
https://babylonbee.com/news/in-support-of-student-loan-cancellation-aoc-dons-tax-the-poor-and-give-it-to-the-rich-dress
Sarah Hoyt’s post is a riff on this one, expressing similar worries but from a different perspective.
And with a very idiosyncratic analogy.
https://accordingtohoyt.com/2022/08/25/rains-of-spiders-and-women-birthing-snakes/
If you aren’t a regular reader, just plow through the typos and somewhat disjointed syntax. These daily essays are a stream-of-consciousness public journal, not proofed for formal publication.
Always thought provoking, always … odd.
Wrong tab; look at ‘The left explains the Trump voters’ instead.
TommyJay:
Thanks for the in-depth response!
Holding the Senate makes some sense. I try to understand people as acting somehow in their own interest in their own terms.
I’d agree that debt forgiveness isn’t likely to move the needle much in either direction.
Perhaps there’s also an element of distraction from the ongoing bad news of inflation and the lack of real accomplishments by the Biden administration.
About the only other accomplishment I can think of is the so-called “Inflation Reduction Act.” I understand even the media doesn’t refer to it by that name because no one believes it will reduce inflation.
When I got out of basic training in December 1959, I read about the “National Defense Student Loan” program. I had joined the reserves so I could work and go to school at night. It seemed a great idea and I applied in early January. When asked my major, I said “premed.” The lady said, “I’m sorry but you are not eligible because most pre-med majors don’t get into medical school.” So I left and walked around the block. I entered the student loan office and, when asked my major, said “English Literature.” I was granted the loan and took pre-med courses as electives along with English Literature. A year later, I was accepted to medical school for September 1961.
In medical school, I was granted a scholarship and did not need any more loans.
I should add that I expect this will be denied by a court AFTER the election and is all the usual Democrat scam. They will blame Republicans.
Tommy Jay,
The Federal Reserve states if inflation has been under 2% for a number of years, they will let inflation remain above 2% for a time.
This does seem like a perverse standard if the mandate is stable prices.
“Moral hazard” always made me scratch my head. Now I know what it means, but it still seems like an awkward term. But who could come up with a better one for the concept?
If the debt cancellation were bundled with attempts to control the price of college tuition, this might have been a clever move. Without that, it’s just stupid pandering.
I wouldn’t call it desperate, though. The democrats anticipate losing seats this year, but they’re trying to get as much to their base as they can before the election and hoping to minimize the possible losses.
(different than the “Chris B” above)
to huxley … my seat-of-the-pants guess on this has also been ‘act of desperation.’ If the Democrats are worried about motivating their now apparently solid constituency of largely white aspirants to the upper middle class with this kind of give-away then they must think they are in real trouble.
My understanding is that the higher figure for the cost of the program (as calculated by balances owed but no collected) is based on accompanying changes to the repayment schedules. As Brian E (I think) noted, the payment amount is dropping from 10% to 5% of discretionary income, the discretionary income calculation is changing, and, in addition to the immediate $10k/$20k loan/Pell Grant write-offs, any loan balance remaining after 10 or 20 years of payments will now be written off rather than collected. I believe the low figures are just the amounts being written off immediately with the larger amounts attempting to estimate how much will be written off in the future under the new repayment plans.
I started at a private liberal arts college in the fall of 1969. The annual cost was $2,600 for room, board, and tuition. While still in school I purchased a used, very basic 1967 Ford Mustang that originally listed new for roughly that same $2,600.
Fast forward 50 years and the 2019-2020 cost at my alma mater had risen to $56,680. The list price of a basic 2020 Ford Mustang–a vastly superior vehicle to the ’67-was in the $27,000 range.
I offer no further comment.
Brian E on August 26, 2022 at 12:16 pm said:
“This does seem like a perverse standard if the mandate is stable prices.”
But as you probably also know, other congressional mandates in the Federal Reserve’s charter now also include full employment. My understanding is that employment is really driven by entrepreneurship, innovation, new ideas, and then gaining access to capital to pursue those ideas. It has little if any direct relationship to the quantity of money in circulation, even that pushed out there to satisfy “economic demand” [as opposed to purchasing desires].
The Fed is now basically a 4th or 5th branch of government, but its charter should be revised back to being only responsible for maintaining stable value of the dollar, given the ups and downs to be expected in the normal marketplace (especially one where the money is of the fiat variety).
Oh, and managing a responsive and capable check clearing system among the banks so the systemic problems of 1907 do not return.
Well, why not make those you think are icky pick up the tab for “the better people”
The pandemic brought out the worst from the left. This from relatives, classmates, friends. A retired assistant state attorney general has posted that Americans deserve a polio epidemic, presumably to kill off the vaccine doubters, and advocates castration as retaliation for the Dobbs ruling.
M Smith….”If the debt cancellation were bundled with attempts to control the price of college tuition, this might have been a clever move. Without that, it’s just stupid pandering.”
It is also an attempt to keep the ‘higher education’ machine, which has been sputtering a bit lately, running full blast…the universities (and their staffs) are major democrat campaign contributors, as well as representing a key aspect of information-environment control.