Why Is This Not a Good Idea...?

Consumer debt overhangs the US economy, causing the Fed to fret, economists to natter, and Republicans to lecture.  The largest component of consumer debt is, of course, the home mortgage, which totals $7.8 trillion.  But second largest?  Not auto loans nor credit card loans nor home equity loans; student loans total more than any of those, with over one trillion dollars outstanding. By one measure, over 30% are delinquent; another report says 11%.  Whatever, delinquent or not, these loan balances, which average $29,000 per, strap some 340,000 potentially productive citizens.

What if we could relieve the banks of the worrying about and reserving for those loans; free up those indebted students to begin spending their discretionary income; and let the Fed encourage banks to do more local, commercial lending?

 

How?  Have the US Treasury assume student loans of those indebted graduates who have a full time job.  The Treasury could service the loans at existing interest rates, accelerating the principal amortization, to over five years, so as to reduce total interest payments and spread the fiscal hit. The Fed would relax and not pressure banks for extra reserves, freeing up loan capacity for the rest of the economy.

And those indebted graduates?  Unlike auto, credit card and home equity loans which recycle back into the economy in the form of spending, student loans are to buy product from  a very narrow segment of the economy -- colleges and universities -- with limited multiplier effects on the broader economy.  Free up working graduates from their debt burden and watch them move out of their parents' house, repair their car or buy new tires, treat themselves to a new outfit, dine out more often, maybe even set the date and buy that engagement ring.  These young adult, working graduates are potentially our most powerful cohort of consumers, but many (not all) are now hamstrung by debts their jobs can't support because the economy lacks sufficient demand to create more and better paying jobs.

So what's wrong with this idea?  Moderate Republicans and Democrats should love it, though deficit hawks will squawk.  Banks should like it; they get repaid from a reliable creditor and their costs of administering loans drops to near zero.  The Fed relaxes.  No government handouts to dodgy recipients for talking heads to argue about.  True, the budget gets hit with another $250 billion or so for five years.  But Chambers of Commerce will feel more vibrancy in this consumer driven economy, and tell their representatives.   And the deficit will continue to fall.  So what's not to like?

Some problems to solve: how to handle current and future students who will still need loans to complete their studies.  And where to trim other spending to satisfy the deficit hawks who will demand their pound of flesh. 

Is this doable? Perhaps; tough but feasible.  Is it a cure-all for our economy, which stumbles along at about a 2% annual rate of growth?  Hardly; we need to address minimum wage, the tax code, retraining, Pell grants and lots more to get things moving again.  But why not start by unburdening these recent and valuable graduates as one major step in the process? 

PS.  There must be something wrong with this idea, or it would have been done by now.  But if it's only the difficulty of convincing Congress and finding the will to undertake it, then let's get at it!

(These thoughts mulled over while waiting for my wife at Murphy's Bridge, skate skiing in the Wood River Valley of Idaho.)