Thursday, March 12, 2009

Forgive Me, Uncle Sam, For I Have Not Sinned

There's been some talk about student debt forgiveness as a way to stimulate the economy. (See ATL, University Business, and The Huffington Post.) My first thought was, "Yeah, right." My second thought was, "Please God, make this happen!" I'm no economist, but, at first glance, forgiving student debt makes about as much sense as any other piece of the bailout. Moreover, it seems much more politically palatable than bailing out the auto industry, bad mortgages, or wall street. Students, after all, didn't make questionable (read: bad) decisions that got them into this mess; they relied on a system that failed. Besides, everyone loves education!

So I guess the real question is, would this work? And what would you do if all of your debt was forgiven tomorrow?

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20 Comments:

Blogger tj said...

I'd run naked through the streets of Berkeley.

Fortunately for innocent bystanders my naked body would be obscured by the thousands of others doing the same.

3/12/2009 12:00 PM  
Anonymous Anonymous said...

http://en.wikipedia.org/wiki/Moral_hazard

3/12/2009 12:54 PM  
Anonymous Anonymous said...

If graduated from high school and skipped college to be a carpenter, plumber, salesman, secretary, etc., etc., I would hate any such plan. Subsidized student loans, already a great deal for the middle class paid for by the rich and the poor, would give way to an outright transfer of wealth from to those with the best prospects going forward.

At least have the sense to tie it to principles of restitution and forgive only the interest on the student loan.

3/12/2009 1:00 PM  
Anonymous Anonymous said...

Forgiving student debt actually makes less sense than any other piece of the bailout. Especially to those students who have very little debt because they worked coming out of college and actually saved money for law school (Saving? What's that??). The reason it makes less sense (as opposed to "just as much sense") is that you aren't even saving any jobs by forgiving student debt.

3/12/2009 1:01 PM  
Anonymous Anonymous said...

Taking out massive debt to finance an expensive education is arguably as reckless as taking out massive debt to finance a home. Just as homebuyers made an assumption that their home prices would not decrease, many students made an assumption that their expected biglaw starting salary would not decrease. Both assumptions failed to account for the real risk of economic contraction and therefore both decisions were questionable.

3/12/2009 1:05 PM  
Blogger Toney said...

While I don't necessarily agree with wiping out all student debt (I like the idea of interest forgiveness), I think the premise of 1:05's comment is the most silly thing I've heard all week.

Everyone takes on massive debt to buy their house. What do you suggest? No one buy houses? The problem isn't just that house prices fell, but that the mortgage terms were terrible or crooked, and the variable interest rates skyrocketed. People should have been more realistic when buying a house, and a lot of this could be avoided.

But a similar analogy cannot be made about law school. There aren't cheaper options or smarter ways to finance. Do you recommend people stop going to law school altogether? Or that law school should only be available to rich kids? While economic contraction should always figure into the cost-benefit analysis of financing an education, choosing to pursue higher education is never "questionable".

3/12/2009 1:15 PM  
Blogger Matt said...

Toney, was the price of a legal education the same at every school you were admitted to? That wasn't the case for me. And I think, by some crazy stretch of the imagination, the housing analogy holds in such cases: just where some bought a house out of their price-range, one might attend a law school out of one' price range. I think, anyway.

3/12/2009 1:21 PM  
Anonymous Anonymous said...

Toney: Sorry, insert "that you cannot afford" after home. And yes, I do think that taking out massive debt to finance home purchases is both a) reckless and b) the reason home prices became so inflated to begin with.

There is indeed a cheaper option for financing law school, enunciated at 1:01 -- get a freaking job and save some cash. If you couldn't get a job after 4 years of college, you made a bad decision to spend money on college (try a different major or profession - plumbers and electricians actually do quite well).

Even if you must choose debt, you are responsible for taking a calculated risk. If you didn't make that risk calculation, then you certainly made a questionable decision. If you did consider the risk, then you have accepted that risk and don't deserve preferential treatment over someone else who played it safe.

The statement that "choosing to pursue higher education is never questionable" is absolutely the silliest thing I've heard all week. If you choose to pay 50k to get a comparative literature degree at NYU, that my friend is a luxury not an investment.

3/12/2009 1:32 PM  
Blogger Dan said...

I think it's not really a 1:1 comparison. While some mortgages were probably about as financially sound as taking on debt to attend a top 10 law school, many were not.

Regardless, I don't really have a problem with the mortgage bailout. But a lot of people (Rick Santelli) seem to, and my point was that, politically, forgiving student debt is less objectionable.

3/12/2009 1:35 PM  
Anonymous Anonymous said...

While I agree that forgiving student debt (as happy as it would make me) would do little actually stimulate the economy, 1:05 and 1:32 (same person?) are just wrong. so you chose to get a job first and then go to and pay for law school. i chose to go to law school first and get a job and pay for it later. it's exactly the same thing -- except my way, i'm paying interest to the government, which arguably helps the country more. before the economy crashed, it would have been a ludicrous argument to make that taking out government loans to finance higher education is risky. it's also a little offensive to say that if you can't afford to pay for your entire education up front, you shouldn't go. that would mean that -- along with lots of other smarter and more important people, including President Obama -- would have had to make due with a high school diploma. do you really want to be arguing that?

3/12/2009 1:50 PM  
Blogger Toney said...

Matt, two assumptions:
1. In-state tuition isn't available to you (I know this weakens my analysis, but I think most people have to face this reality, or at least "earn" in-state tuition).
2. You are attending a Top 25 law school. Because going to a school ranked lower than that can significantly affect your starting salary regardless of the economic situation, I'm only going to use tuition info from the top 25.

Having said that, the standard deviation for tuition at the top 25 schools is a scant $2960. As far as standard deviations go, this is incredibly small. Yale is the most expensive at $43750, and Minnesota is the cheapest at $32005, for a range of less than $12k. Things get even tighter within the top 15, with Virginia at $38500.

So yeah, I don't think the house analogy is appropriate or accurate here.

And 1:05, you're just plain wrong. Show me someone that didn't take out massive debt to buy any house, and I'll show you someone with a trust fund. Even in the conservative 60's and 70's people would only put 20% down. Maybe our difference is merely semantic, as I consider borrowing $400,000 to buy a house with $100,000 down "massive", even assuming it's a great deal, the value of the house doesn't go below that even in harsh economic times, etc. Any time you borrow money to buy a house, it's going to be a lot of money. If your definition of "reckless" includes "any that borrows a lot of money", then you include 99% of home-buyers in the last 15 years. Congrats.

The housing bubble didn't happen because people borrowed lots of money to buy houses. It happened because people borrowed more money than they could afford at really crappy terms, which inflated house prices unsustainably.

Also, no one saves up for a $100k grad-education. The several years that would take could be used earning money at the rate you could make post-grad. Any rational cba would slap you in the face if you chose the former.

Also, it was dumb of me to say that pursuing further education is never questionable, as your goofy example shows.

3/12/2009 1:52 PM  
Anonymous Anonymous said...

FYI-- good discussion with the facebook book creator, etc.: http://blackbooklegal.blogspot.com/2009/03/open-thread-student-debt-solutions.html

and the original group itself: http://www.facebook.com/group.php?gid=46657437878&ref=ts

3/12/2009 2:01 PM  
Anonymous Anonymous said...

Crazy Argumentative Guy here (Call me CAG for short).

1:50 said "so you chose to get a job first and then go to and pay for law school. i chose to go to law school first and get a job and pay for it later. it's exactly the same thing..." Yeah its exactly the same thing unless you can't get the high paying job you were expecting and then want my taxpayer dollars to bail your risk-seeking ass out. Yeah, you made an assumption that the economy would continue doing well based on the last 5 years. Well guess what? Past performance is not an indicator of future results. Having graduated during the tech boom, I know that there are no guarantees you will get the job you want after graduation. Assuming you are past puberty, you should know this too. Finally, education IS a luxury in many respects, and you can't always get/don't always deserve what you want. I'm all for helping marginalized members of society rise above through well-organized social programs, but I doubt you would be bold enough to claim that a one-time, ex-post student debt bailout is the best way to realize social change.

Toney: I personally know a number of people who paid for their houses outright, and ALL of them came from poor families. Perhaps there is a correlation here because there are people who subscribe to the "school of no debt" and many of them had been reborn from the ashes of bankruptcy. Again, just because you want that tiny studio in SF for $500k doesn't mean you deserve it. Check into Detroit, where the median house price is somewhere around 12k. Of course, there are more moderate gradations in between these extremes, and I agree that we are likely using a different definition of massive. When I say massive debt, I interpret that directly in relation to the amount you can reasonably service at a fixed interest rate (yes, they do exist!) and after saving enough for a generous down payment and emergency fund to see you through economic strife.

Oh and P.S. home ownership is not the end all and be all of a happy life. Try renting.. you may end up better off financially, and you will have less to worry about when your husband finds out you're cheating on him and wants half your assets.

3/12/2009 2:18 PM  
Blogger Dan said...

So wait, you're cheating on your husband, AND you're pissed he wants (/is entitled to) half your assets? That's pretty rough.

3/12/2009 6:12 PM  
Anonymous Anonymous said...

Student loans are unsecured debt. You don't acquire any equity in a property, but you also acquire something that cannot be taken away from you, no matter your ability to repay the debt. Sure, the value of your "education" may rise and fall due to changes in the economy, but it is usually (sorry English majors and TTT law school students) an investment in your self that can pay off in the long run.

The similarities between student debt and homeowners debt ends with "you borrowed a sh*tload of money". Hell, right now borrowing to invest in your self is the SAFEST investment you can make.

(Also, forgiving student debt, while I would LOVE it as I owe the equivalent of a condo, makes very little sense and would be a pure handout to a largely privileged class, sorry...)

3/12/2009 7:26 PM  
Blogger McWho said...

I was going to read your post, 7:26, until I saw that you used the phrase "TTT".

3/12/2009 9:00 PM  
Blogger Dan said...

Round 1 to McWho.

3/13/2009 12:58 AM  
Anonymous Anonymous said...

I'm only cheating on my husband because he's emotionally abusive. He doesn't deserve 50% of my crystal figurine collection.

3/13/2009 6:51 AM  
Anonymous Anonymous said...

7:26: "Hell, right now borrowing to invest in your self is the SAFEST investment you can make."

That's why I took out a HELOC (Human Equity Line of Credit) to pay for my Botox. The market can only go up!

3/13/2009 1:30 PM  
Anonymous Anonymous said...

I would immediately go out and stimulate the economy.

3/13/2009 6:21 PM  

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