How to Fix the Student Debt Crisis

The Federal Reserve can end the Student Debt Crisis

The student debt crisis is getting worse every day. Outstanding student debt in the United States equals $1.3 trillion. That sounds like a lot of money, and it is. Yet, it pales in comparison to the immense amount of money the Federal Reserve has given to the banks. This was done through the first bank bailout, and what is called quantitative easing.

Quantitative easing is when a central bank (Federal Reserve) purchases assets – stocks, bonds – from a financial institution. This injects money into the banking system. This is money banks can use to purchase new assets to replace the ones purchased by the central bank.

This raises the prices of assets – boosting the stock market and – at least theoretically – encourages banks to increase lending and spur economic growth.

Giving money to the banks hasn’t helped growth

It hasn’t worked quite as planned. While the value of the stock market has grown dramatically, banks have not increased lending as much as expected. In fact, the banks have kept most of the money – about $2 trillion – rather than lending it out.

Through quantitative easing however, the Federal Reserve has set an interesting precedent: A central bank can purchase assets with the goal of freeing the financial system up for further lending and growth.

That is the foundation for the solution to the student debt crisis: The Federal Reserve should purchase all the student loan contracts in the economy and create new money. Then, they can use that money to pay off all the contracts. This would inject $1.3 trillion into the economy, while freeing an entire generation from a massive debt burden.

Freed from the burden of repaying student loans, student loan borrowers would become more credit-worthy and more willing and able to spend money. This increased credit worthiness would increase lending and spending. This would boost economic growth. Ending the student debt crisis would provide a huge economic benefit for everyone.

There is no logical reason why this can’t be done. Loan contracts are assets. The Federal Reserve can buy assets. The Federal Reserve can print money and inject that money into the banking system. That is exactly what buying all student loan contracts would do. Student loans are already guaranteed by the government, so this is not a big stretch of the imagination.

Bank bailouts set a precedent for ending the student debt crisis

A bailout for student loan borrowers would be a massive stimulus program and would not add a dime to the federal deficit. But surely you’re thinking, “The Federal Reserve can’t just create $1.3 trillion in new money out of nowhere can they?” Well yes, of course they can. They do it all the time. Remember, all money is created from nothing.

Since 2007, the Federal Reserve has created about $3 trillion in new money, most of which is still sitting in the banks as you read this.

It is a sign of how skewed our economy has become that the idea of bailing out heavily indebted student loan borrowers sounds exotic, while shovelling money into massive banks seems normal. The student debt crisis can be ended quickly and easily.

American Money

Money only has value because we believe it does. That means the only real limit on central banks money creation is the willingness of people to accept that money. If adding $3 trillion in new money since 2007 did not destroy confidence in the U.S. Dollar, why would adding $1.3 trillion be a problem?

It seems some people are fine with creating money so long as it goes to big banks and corporations, instead of helping the people. If we can give tons of money to the banks, why can’t we use that money to end the student debt crisis?

Remember, in 2008 the U.S. Government went from a stance of “No bailouts,” to giving the banks over $700 billion in one fell swoop. And that wasn’t even central bank money, that was money from the U.S. Treasury – ballooning the deficit to over $1 trillion.

Ending the student debt crisis could lead to an economic boom

Imagine the economic benefits of monetizing all student debt. Imagine the economic surge from an entire generation being freed to make new car purchases, new home purchases, and start new families. It could all lead to an economic boom.

The fact is creating money can significantly benefit an economy when done in a reasonable way and when directed effectively. It can do so when it increases demand among a group that is consuming far below their potential. Because of student loan debt, an entire generation is putting off home ownership and many other purchases, which is very harmful to the economy. But it doesn’t have to be this way.

If the government and Federal Reserve can put trillions of dollars into bailing out the banks and boosting the stock market, they can put $1.3 trillion towards a bail out for student loan borrowers and end the student debt crisis.