Thursday, August 30, 2018

Who is ultimately liable for defaulted student loans?

There are about $1.53 trillion of outstanding student loans. (See https://www.zerohedge.com/news/2018-08-28/how-us-education-became-debt-sentence.)  This number goes up more than $200 billion per year and is expected to be nearly $2 trillion by 2020, and $3.3 trillion by 2024.  Somewhere between 33% and 40% of this will be defaulted on.

It is not clear (to me) exactly who this is owed to, let's just call it Sallie Mae, although I don't think that is quite right, but let's pretend it is.  Sallie Mae sells bonds to finance its activities, but all of the bonds are bought by the Treasury.  In theory, students will get better jobs and just pay it all back.  However, at least $1 trillion will be in default by 2024.

What happens to this defaulted debt? It can't be discharged in bankruptcy, so it won't go away.  It is guaranteed by the U.S. Treasury, but I don't think the Treasury pays the accrued interest.  If you have a debt, but never pay it back and never pay interest on it, does it exist?

So the existential question is, does this debt "really" exist?  Of course it exists, it is in a computer somewhere but does it "really" exist?  There are two answers.  First, yes, and it should be added to the national debt because it is guaranteed.  Second, no.  It is an "off-balance-sheet" investment by the Treasury, a bad investment at that, but the funding for this came from borrowed cash, and it is already part of the national debt.  I am leaning towards the second answer, but am still puzzling this.

Now the real questions.  If student loan debt is really already part of the national debt and the national debt will never be paid back, then why does it matter if student loans are being default on?  And why should anyone ever repay their student loans, except as a moral obligation by those who benefited?  Are we inexorably headed indirectly into American-style socialism, with free college education for all? If we are, who is harmed by this?  Did I just talk myself into becoming a socialist?  What differentiates Bernie socialism from Venezuela socialism?

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