Market Overview

Revisiting Student Loans: Societal Tension and Portension


With respect to student loans, it is as if for those who know where to look, the writing is on the wall. Given recent political events and ongoing political dialogue, let's revisit the issue of student loans.

I. Should there be a student loan bailout?

CNBC's Kelly Evans discussed on April 25, 2012 whether student loans will be the next bailout. As student loan debt is roughly $1 trillion while graduates struggle with a weak job market, Evans wrote that Americans should be worried regarding the future of student loans. Evans commented that "acknowledging the problem is perhaps the easiest step. Much more difficult is the question of what to do about it."

In terms of simply forgiving student loan debt, Evans cited three major issues. First, "the losses from any such debt reduction scheme will have to be borne by someone, most likely taxpayers, at a time when government finances are already stretched." Second, there is the issue of moral hazard: "rewarding and implicitly encouraging imprudent behavior rather than punishing it." Forgiveness of student loans may send a policy message to young adults that there are no repercussions for poor business decisions; students may decide to take on even more debt. Third, there remains the "question of how to keep future graduates from accumulating a mountain of student loan debt just as large, if not larger, than the one just leveled."

According to Evans, the third issue is perhaps the "most pressing  -- and most vexing -- and which also offers the most opportunity for innovation." In terms of innovation, for the sake of discussion Evans mildly hinted at a possible "education tax" as an alternative system where college would be "free" and students would be assigned to institutions based on a lottery. Alternatively, why not abolish college altogether with more societal emphasis on "specialized trade institutions" while "requiring a 'gap year' of liberal arts prior to entry"? Or perhaps we could offer high-school graduates the choice of student loans for college or a business loan for a startup. In terms of such options, Evans wrote that "[t]hese all seem ridiculous, but then so too is our current state of affairs." As per economist Justin Wolfers' observations, there would appear to be strong arguments as to why there should be no student loan bailout. Even so, where do we go from here?

Regarding where we are today, Evans wrote: "Our current system, in fact, has so failed that it may now be exacerbating income inequality (by saddling low-income students with high loan balances and shaky job prospects), economic malaise (by keeping would-be homebuyers stuck in costly rentals because of already high debt loans and/or poor credit histories, thereby damaging both the housing market and potential consumer spending), and long-term economic vitality (by hampering household and family unit formations with a higher share of 20- and 30-somethings currently stuck at home with mom and dad)." (emphasis added) Economic problems with higher education and student loans would thus appear to portend serious societal problems going forward.

From the perspective that the current higher education system is an abject failure, Evans suggested that perhaps "it may be far less costly for taxpayers in the long run" to simply forgive much of the current student loan debt. However, Evans noted that systemic reform is needed to ensure that "debt loads simply won't start to pile up again." In the end, Evans concluded that "if we do nothing to alter the status quo, we will have no one to blame but ourselves for the bleak outcome." Interestingly, Evans' report did not include the word "bubble".

II. The latest credit bubble

Of course, the idea that the student loan phenomenon in the US is a textbook financial bubble is not news for some of us. Zero Hedge has done well to keep up the drumbeat of problems related to the higher education bubble and excessive student loan debt. Recently, Zero Hedge's Tyler Durden wrote: "Frankly, by now the topic of US student debt has been discussed to death, and like every other bubble, it will keep growing ... until it bursts." In comparing higher education systems in the UK and the US, Durden noted that "the latest credit bubble, no matter if its US or UK iteration, continues merrily along, until it is forced to finally stop". Durden: "Alas, with private lenders now out of the market, and the US government the lender of only resort, the administration's generosity with other people's taxes will hardly ever be tested, until well after the fact." Durden concluded ominously, "By then we will likely have other problems."

Durden's analyses on the issue of student loan debt portend that the current system will result in a generation of debt slaves. On April 26, 2012, Durden argued that in terms of fixing the problems of student loan debt, "nothing will happen ... [b]ecause that ultimate enabler of the status quo -- America's higher learning system itself, is dependent on perpetuating the status quo. Because if loans are harder to come by, college tuitions would tumble, and the very fabric holding the lie that is modern socio-economic surreality would implode."

And see, there's the rub: the higher education system itself. One might argue that the higher education system has been the one of the primary beneficiaries of student loans and the higher education bubble at the expense of massive debt burdens for young adults. Even in light of the current system, given the fact that the higher education bubble is acting like a textbook financial bubble, our situation strongly suggests that at some point, the cost of college tuition will have to tumble -- thereby possibly tearing the fabric of our modern "socio-economic surreality". If one concedes that the higher education bubble is acting as a textbook financial bubble, our situation portends that the higher education system in the US will in the not-so-distant future effectively be leveled and collapse -- not only in terms of finances, but also in terms of legitimacy and credibility; this may have dire implications for the US labor market, job training, and contemporary bureaucratic norms. Durden's abovementioned analyses on this subject are significant in that (1) the higher education bubble has to be perceived in the context of these "other problems" that our domestic and global economies will have to face in the coming decades, e.g. Social Security and water scarcity, and (2) the higher education bubble's bursting appears to portend that the social fabric will be torn.

III. The writing on the wall

Ergo, even if we choose to debate the issue of student loans on the national stage, we have to appreciate that the phenomenon has multiple dimensions and rests in the context of a potential global economic collapse that is effectively centered around speculation, credit, debt, and inflation.

On the April 27, 2012 episode of the Mark Levin Show, conservative commentator Mark Levin discussed various perspectives on the student loan debt issue in terms of higher education, debt burdens, and the government's role in the problem. Aside from the general tone of the discussion being unsympathetic to student borrowers, one thing interesting that I took away from the debate on Levin's show is that the issue of student loan debt has multiple dimensions and cannot be viewed from merely one abstract, ideological perspective. Whereas Levin argued that students shouldn't have taken on so much debt if they were unwilling or unable to pay it back and that students ought to bear the ultimate burden for their poor investment, I am not sure that the issue is that simple.

Going along with my previous analogy of a worldwide Monopoly board, I cannot say that the rules of the game justify students' bearing the burden of student loan debt absolutely. In particular, socio-cultural norms that effectively demand that young adults to go to college and take on debt are characteristic of our contemporary economy. The fact that graduates are entering a weak labor market goes beyond bad luck and poor investment; it reflects very serious systemic, demographic flaws with not only our society and our economy, but also our culture. In other words, it appears that today's young adults never had a fair chance at not only a fair-priced education, but a fair opportunity to have a job. In a way, it's as if the game itself is more responsible for apparent socio-economic failures than the players.

I can appreciate Levin's perspective that those who take on debt should be expected to pay it back and that individuals should bear the burden for their own bad investments, but it's as if young adults were thrown into the game not even knowing the rules of the game or the fact that a game was going on. Young adults may not have been aware that a higher education bubble was perhaps many young adults never had to study economics in high school. Even if individuals ought to pay the price for bad investments, given our time period and the world that we live in, dare I say it, it's like many young adults never had a chance -- and when the object-in-question is something so fundamental to the human experience as a job, it becomes difficult to argue that an entire generation of young people should be forced to pay the price for playing a game that they effectively socio-culturally had no choice but to play in the spirit of self-interest. This is not to say that all young Americans should be thought of as "victims", but one cannot properly analyze the issue of student loans without also taking into account the precarious socio-cultural, global-economic context in which the higher education bubble began.

Nevertheless, in light of Levin's perspective and the discussion on Levin's radio program, it is clear that there are probably no easy answers to the student loan debt issue. That being said, the issue of student loans has many layers and many dimensions. Taking issues like student loans, income inequality, and youth unemployment in coordination with Social Security's problems would indeed portend quite an ominous set of circumstances -- interesting times, if you will. And that's not even getting into demographic changes, overpopulation, water scarcity, international terrorism, climate change, and worldwide geopolitical hostilities. Interesting times indeed.

The actions of the Occupy movement could be seen as being another dimension to the issue of student loans. Whereas I previously addressed issues with what appears to be a delayed "American Spring", it sounds like the official start of the "American Spring" is set to begin on May 1, 2012. One topic that will probably remain on Occupy's agenda is that of student loans. It remains uncertain whether the Occupy movement will be able to reassert itself on the national stage in terms of a cohesive message and specific policy goals.

One cannot help but feel that even in light of the socio-cultural devastation of the higher education bubble, it's as if the higher education bubble remains only one more dire socio-economic issue to throw on the pile. Per the commentary of Euro Pacific Capital's Peter Schiff, whereas a financial bubble may have once been regarded as a "once-in-a-lifetime occurrence", it's as if for many young Americans, financial bubbles are what define the only economy they have ever known! The writing is on the wall: At some point, the higher education will burst potentially leveling the higher education system thereby tearing the social fabric of the nation.

With respect to student loan debt, the image of a sinking ship comes to mind. Let's say that a portion of the passengers in one area of the ship protests to the ship's officers that their quarters are on fire owing to a kitchen accident that occurred as a result of the ship's hitting an iceberg. The fire-affected passengers may say that they should not bear the loss in light of the fact that the fire is not their fault. The rest of the passengers and officers exclaim, "Why should we worry about your rooms' being on fire when the entire ship is sinking?" One cannot help but hear glimpses of this analogy in the midst of the student loan debate. Per Durden's remark, the issue of student loans has been discussed to death, but it's as if we haven't gotten anywhere regarding possible solutions.

Whereas some may respond harshly to the idea that there should be a student loan bailout, there would appear to be no easy answers to the quagmire that affects an entire generation of young people. This discussion brings to mind the Sadducees' ethical incentive: We ought to behave and be good people for not only ourselves, but also future generations. Of course, one of the last dimensions to be considered is the fact that one day today's estranged younger generation (with massive student loan debt) will be in power (albeit one has to wonder what the planet will look like at that point) -- making the political and socio-economic decisions regarding taxation, benefits, and entitlements for the old and the young. It's enough to make one wonder: Given the problems before us in terms of Social Security, a weakening dollar, youth unemployment, political polarization, military hostilities, overpopulation, and water scarcity, how confident can one be in saying that it will all come together and work out in the end? Along the lines of Evans' analysis, at some point the status quo is going to have to change.

Posted-In: CNBC Politics Psychology Topics Economics Media Reviews General Best of Benzinga


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