The Student Debt Slowdown: An Overhang of $1.4 Trillion

I was never the biggest fan of John Maynard Keynes. While he was a brilliant economist — and a sometimes solid investor — he was a disaster with policies. His ideas have given generations of politicians from both parties cover to run wildly irresponsible deficits. But while Keynes was wrong about a lot, his thoughts on the Paradox of Thrift are interesting.

order cialis canadian pharmacy The Student Debt Plague 

In a nutshell, frugality is a paradox — what is good for the part is terrible for the whole. If you or I are frugal and save our money, that’s good for us. But if everyone were as big of a cheapskate as me, the economy would grind to a halt, income would drop, and it’d be difficult to save much of anything.

And it’s an idea that pairs well with a current hot topic: student debt.

Just recently I watched a video of Democratic presidential contender Bernie Sanders talking about student loan debt forgiveness.

Now, I’m not a fan of bailouts. I wasn’t a fan of the banks getting bailed out back in 2008, and I’m not in favor of irresponsible universities and their former students getting bailed out today…

And it would absolutely be a bailout for both the universities and the students. I blame the universities more than the students, who were, after all, impressionable children at the time they were suckered into taking on debts. Universities irresponsibly raised tuition prices to unaffordable levels knowing that students could always borrow whatever they lacked. But the students went right along with it, never stopping to ask if the numbers made sense.

That kid who worked his way through college waiting tables… well, he’s just a sucker. Didn’t he know his rich Uncle Sam would have eventually picked up the tab?

And never mind that forgiveness of college loans is about as regressive a tax on poorer and less educated people as you’re ever going to find. Blue-collar taxpayers without a college education would be paying for the educations of white-collar professionals or even doctors who almost certainly make more money than them. That hardly seems fair.

But I digress…

order cialis online The Potential In Forgiveness

The loan forgiveness debate actually did raise some valid points.

A dollar spent on student debt service is a dollar that’s not available to make a down payment on a house or car. That debt overhang reduces the lifetime spending potential of the debtor. Permanently. And when you’re talking about a large generation of people, that’s a problem.

If they all collectively spend less due to their debt service, then the economy grows much slower, which leads to slower wage growth and makes it harder for them to pay their debts.

There’s no real solution to this problem. If we forgive student debt, then all of us — including the debtors — suffer from higher taxes and slower growth. If we don’t forgive the debt, then we also suffer from slower growth due to the debt overhang.

So, no matter what happens… we’re all paying the price for decisions made by others, even if they’re sometimes underinformed decisions, or misinformed, or just plain poor… There’s a lesson here, and it’s to be sure that your children or grandchildren — perhaps even you, yourself — read and research the risks and costs that come with student loans. And have that discussion with whoever might want to attend college about the cheaper, alternative options — like community college or trade school — instead of going straight to a four-year institute so they can live like Van Wilder.

generic sildenafil citrate An Idea To Solve It All…

Here’s an idea. It’s probably not legal, but legality seems to be a murky concept these days. Why not fund partial debt forgiveness with the hundreds of billions of dollars sitting in university endowments?

Harvard alone has nearly $40 billion sitting in its endowment fund. With that kind of money, it’s questionable why they charge incoming students at all. They could certainly afford to chip in. And if we’re voting to spend other people’s money, I’d prefer that Harvard pay rather than the American taxpayer.

Of course, that’s not likely to happen. But there are some other solutions here, too.

College sports are massive money makers for ostensibly non-profit institutions. Perhaps a tax on college football tickets or TV rights with the proceeds dedicated to lowering tuition or outstanding debt of the students of the respective school is a nice start.

Or perhaps rather than a government mandate to raid the college endowments, alumni band together to pressure the endowments to share the wealth a little.

And in your personal life, let’s instead focus on some more practical actions.

If we know that growth is likely to be more modest due to debt overhang, this favors value and income strategies over growth strategies in the decade ahead.

Buying high-quality, high-yielding dividend stocks and other securities that benefit from a low-inflation environment makes sense.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.