Holders of student loans –most of whom are no longer students–carry a combined debt burden that stands at a record high of $1.5 trillion, more than 8 percent of GDP and more than the $1.3 trillion in direct costs of waging war against Iraq.
The Desirability of Cancelling Student Debts
The burden weighing like a nightmare, to coin a phrase, on 44 million indebted current and former students will haunt these people for a good portion of their lives. The average student debtor graduates owing close to $34,000 and is projected to spend 21 years paying it off. At present, the average monthly payment for those between 30 and 40 years old is $351.00. It is not uncommon for repayment obligations to be borne by underwriters of these loans, typically the primary borrower’s parents, grandparents, aunts and uncles. Taking these co-signers into consideration, we have about 100 million people adversely affected, directly or indirectly, by the difficulty very many have repaying these loans.
Because it is hard to have loans dismissed or renegotiated on the grounds of undue hardship, cases like the following are numerous: a 2008 graduate entered the job market with $50,000 in student debt. After the September meltdown he was laid off from his $29,000 a year job and had no choice but to default. His mother, a laid-off factory worker, had underwritten his loan, and so $120.00 of her $300.00 unemployment check was garnished in order to service her son’s federal loan. Her plea that this arrangement imposed undue hardship fell on deaf ears.
Renegotiating the terms of a subprime mortgage, no mean feat, is easier than having the terms of a student loan readjusted. After her home was foreclosed and she managed to have her mortgage renegotiated due to bankruptcy, Sallie Mae refused to rewrite a woman’s student loan. She was allowed, however, to defer payment. Extensions and postponements went on for 14 years, the original loan of $28,000 had increased to more than $90,000 and monthly payments had jumped from $230.00 to $816.00.
Default charges, relentlessly compounding interest rates and collection-agency fees make up a hefty portion of current student-loan debts. A medical student graduated owing about $250,000. Residency and an unexpected serious illness forced her to defer payments after a number of inevitable default charges. When her loan was turned over to a collection agency a $53,870 fee was added. By this time her debt stood at $555,000.
In these times when the typical new job represents an “alternative work arrangement,” i.e. part-time, low-pay work (1) and an increasing percentage of employed workers are stuck in this type of job, trying to keep up with loan repayments is taking a punishing toll on debtors. Reuters reports that at least 1 in 4 is either sacrificing health care, vacations, new home buying and other elements of a decent standard of living, or is in default. A good number of student debts are in fact debts that simply cannot be repaid.
Two recent studies throw light on what it would look like, in specific and workable terms, if steps were taken to cancel a student debt burden that for many is literally unbearable, and what it threatens to look like if nothing is done. The Levy Economics Institute has released The Macroeconomic Effects of Student Debt Cancellation (2) and the American Civil Liberties Union has produced the truly scary A Pound of Flesh The Criminalization of Private Debt. (3)
The Levy study is more than mildly wonkish; the co-authors produce data series, tables and lay out balance sheet mechanics for a range of scenarios under which student debt can be actually cancelled within the framework of the existing financial system. In this article I will merely sketch their main claims and state their basic conclusions. I conclude with a description of what looks a lot like the rebirth of debtors’ prisons as a response to the superfluity of Americans bearing unbearable debt burdens.
The Mechanics of Cancelling Student Debts
Most writing on student debt details the magnitude of the burden and the inhuman consequences visited upon debtors who struggle to make payments or who just can’t pay. Until the Levy study we have seen nothing spelling out the mechanics of how to actually go about cancelling student debt, (4) or demonstrating the positive effects on the economy of making it possible for income currently shackled to debt repayment to be spent for other purposes. (5)
Student debt can be cancelled as a political project either by government or by the Federal Reserve. Government can finance the cancellation of student debt in a number of ways including: cancelling whole hog the Department of Education’s (DE) loans, whereby all the loans disappear simultaneously; cancelling DE’s loans serially, as payments come due; effectively cancelling loans issued by private lenders by assuming payment of these loans; effectively cancelling loans issued by private lenders by simultaneously purchasing and cancelling these loans, or by purchasing these private loans and then cancelling principal as payments come due.
For those whose ideological predilections favor private solutions to social problems, the Federal Reserve can carry out student debt cancellation by: purchasing DE’s loans and cancelling them all at once; cancelling the payments for the DE loans; taking over debt service payments to private lenders; purchasing private loans and cancelling payments; simultaneously purchasing and cancelling loans owned by private lenders; purchasing loans issued by private lenders and cancelling principal as payments come due.
Any of these steps would free students, former students and co-signers from making any future payments on current outstanding student loan debt. Most importantly, the U.S. financial system as such, i.e. apart from political limitations of choice imposed by discretionary legislation, consists of no structural features entailing the impossibility or undesirability of legislating any of the above measures. Recall that the multi-trillion dollar bailout of the banks was effected without a dime of taxpayer money, as then-Fed-chairman Ben Bernanke averred on 60 Minutes. The Fed simply plucked what was “needed” out of thin air, the way all government money is created. And the redirection of interest payments to consumption spending would not trigger inflation, because (official false assertions of full employment aside) discouraged workers out of the labor force, and workers who want but cannot find full-time employment -and all these number very many- would use the money to put the 20-25 percent of America’s now idle productive capacity to use. An economy with this much slack will not generate unmanageable inflation when idle capacity, human and non-human, is put to work.
With respect to the Fed–a private institution remember, whose seven Board members are bankers–it is perceived need that typically determines the strategies that the Fed is willing to pursue. Needs are class-relative. Bankers needed to be rescued from insolvency, hence the bailout. Working-class homeowners are not among the Fed’s governors, nor are their needs the same as bankers’. Virtually nothing was done to benefit those with foreclosed homes. The owners of the Fed have no interest in addressing the needs of desperate debtors. On the contrary, the Fed’s constituency loves the unending flow of interest payments. What is required to make the possible actual is a national movement, led perhaps by groups like Strike the Debt, marching, disrupting and striking in the name of debt cancellation.
The Benefits of Cancelling Student Debt
Such a movement would educate the population about the current state and social costs of student loan debt. The Levy study, essential for activists, provides the relevant details. It also reminds us that the interest payments on this debt represent not only a significant reduction of debtors’ financial resources, but a substantial sum that has been diverted from alternative, productive uses. The interest payments currently extracted from households are unproductive, increase the insecurity of the working class and go straight to the very wealthy. The effect of wholesale debt cancellation would be to redirect funds now bound to debt service to productive, rather than extractive, uses. The immediate effect would be to boost consumption demand, which would in turn spill over into other forms of spending like increasing production and hiring workers. The study finds that, over a ten-year forecast, cancellation could raise GDP $86-108 billion a year, reduce the average unemployment rate by 0.22-0.36 percentage points, and add from 1.2 to 1.5 million new jobs per year. And by ending the debt-payment drain on household resources, working people’s vulnerability during business cycle downturns would be reduced.
Cancellation of all student-loan debt, then, is both feasible and desirable. Let’s get on with it.
The Criminalization of Private Debt
Elites are well aware that what is in store for the majority of the working population is a future of declining living standards, contingent, low-paying work, debt peonage and declining social services – in a word, secular austerity. High levels of imprisonment, burgeoning surveillance, the suppression by Google and Facebook of access to alternative, independent sources of critical social, political and economic commentary and the militarization of an increasingly brutal police force are repressive measures enacted in ruling-class anticipation of the widespread social dislocation that must attend long-term austerity.
Debtors have been targeted for severe punishment lest they try “to get something for nothing,” i.e. fail to service debts they are unable to pay. The ACLU study provides a wealth of information for educators and organizers. The number of debtors in serious trouble is startling. One in three Americans has a debt that has been turned over to a private collection agency. One in five Americans has unpaid medical bills that have gone into collection.
Student-loan debtors have been in the court system’s bullseye. A Texas man was arrested by seven or eight U.S. Marshals for failure to appear in court. The original $2,500 federal student loan he obtained in 1983 to pay for trucking school had ballooned to $12,000 with interest and fees. The man was not merely unwilling, he was unable to appear in court: he had just undergone open-heart surgery. Had he been able to appear, it would still have been unable to pay. He was retired and subsisting on Social Security and disability. In most cases like this, the court has not cared.
Failure to appear in court for the “judgment debtor exam” is grounds for creditors to have the judge issue a civil warrant for the debtor’s arrest. Failure to appear in court is the major grounds for the issuance of a warrant and/or arrest. Among common reasons for failing to appear include work obligations, child care responsibilities, lack of transportation, physical disability, illness or dementia. These legitimate excuses rarely carry weight with the courts. ACLU found cases in which warrants were issued to terminally ill debtors who died shortly after the warrants were issued. But most often debtors failed to appear because they were not notified of the court date, or, more scandalously, they were not even notified of the existence of the lawsuit. The ineptitude of the courts’ procedures stands in sharp contrast to the relentlessness with which the courts, in collusion with debt collectors, hound the indebted. In Maryland a man, 83 and his wife, 78, were jailed because they did not appear at a show cause hearing in a district court. (Ineptitude and inattention abounds: the server described the man as 41 years old and his wife as his 28 year old roommate.) The issue was $2,342.76 owed to a homeowners’ association, plus $450 in attorney’s fees. Not atypically, the couple had never been served notice of the hearing; they were out of the country when the process server claimed to have performed service. Adding insult to injury, the show cause hearing had been scheduled for the couple’s failure to appear at a post-judgement proceeding, for which they had also never been served.
In this case, like many others, the couple was arrested and a cash-only bond was set in the amount of $2,900, more than the default judgement against them. Of course if the default payment was unaffordable, so was the bond payment. An increasing percentage of locked-up debtors remain incarcerated simply because they cannot afford bail.
Turning State and Local Courts Into Collectors’ Courts
More than 6,000 debt collection firms collect billions of dollars a year for the creditors who hire them. Millions of collection lawsuits are filed each year in state and local courts. These are the majority of cases on many state court dockets, and in many state courts debt purchasers file more suits than any other type of plaintiff. Frequently the courts require no evidence that the alleged debt is actually owed. In theory, this should work in the defendant’s favor, but the vast majority of these defendants are not represented by a lawyer. The sheer numbers of this type of case lead the courts to barrel through collection suits with great speed and virtually no scrutiny. The debtor is doomed from the outset. Over 95 percent of debt collection suits end in favor of the collector.
The implications of this entire setup are more far reaching than the harm described above done to debtors. The damage includes lost wages, lost jobs and psychological distress. And the debtor need not be jailed in order for these damages to take their toll. An arrest warrant by itself can wreak long-lasting havoc on the debtors’ lives: warrants are entered into background check databases, which can jeopardize future employment, educational opportunities, housing applications and access to security clearances.
The ACLU study, from which much of the above has been drawn, documents the pervasiveness of this wholesale and mounting assault on the indebted and the poor. This is but one of the strategies employed in the elite attempt to re-make America into a society that has discarded the protections of the New Deal/Great Society heritage. And of the Constitution. Here we have yet another instance of the effort to return America to the settlement of the 1920s. The deliberate attempt to addict households to debt even as debtors are subject to unremitting prosecution-persecution is but one of the abominations of the march of neoliberalism.
Because the serving of warrants and jailing of debtors has begun picking up steam in recent years, and the financial situation of these potential prisoners has been gradually deteriorating, we have reason to expect that student-loan debtors could come to make up a significant portion of the growing ranks of those threatened with debt prison. Arrest warrants have been issued in California, Florida, Minnesota, Indiana, Maryland, Massachusetts and Texas. Arrests have been heaviest in California, Texas and Minnesota. In many cases there was no announcement of court orders or that the debtor was being sued. U.S. marshals in Minnesota conducted “Operation Anaconda Squeeze” to arrest student-loan debtors who had failed to appear in court for a “debtor’s examination.” Whether they had received prior notice was often thought by the court to be beside the point. As with the cases described earlier, often defendants are ordered to pay much more than the amount of the original loan. A Texas man, who received no prior notice about the debt or the court case brought by a private collection agency on behalf of Uncle Sam, was arrested by seven armed U.S. marshals for an unpaid $1,500 student loan he had borrowed 29 years earlier. He was ordered to pay, after interest and court fees, more than twice the amount of the original loan. $1,258.60 was added to reimburse the marshals for his arrest.
Note that these actions, often conducted by armed marshals, display the ongoing militarization of society that we must expect as creeping austerity becomes the new normal.
Private and Public Debt in the History of American Capitalism
The respective impacts on the economy of private and public debt are thoroughly misconstrued in official propaganda. Political and economic elites make no fuss over the accumulation of massive private debt. It is public debt that unsettles the plutocrats. Mounting public debt and deficits are held to portend State bankruptcy. Private and public debt have produced consistent respective results over the course of U.S. capitalist development, and they are the opposite of what the Party Line puts forward. It is private debt that generates crisis, and federal deficits that ward off depression. Here are the relevant facts.
Of all the developed capitalist countries since the end of the Second World War, America has offered its workers the most niggardly social democratic benefits. The so-called social safety net has been either non-existent or insufficient to provide working-class households with a modicum of material security. Low private-sector wages and a paltry welfare State have made debt -unsustainable debt at that–a necessary supplement to the reward for work. This is clearly illustrated in the only two periods in American history when there appeared to be a thriving middle class, namely the 1920s and the Golden Age of 1949-1973.
During the 1920s, when wages were stagnant, the proportion of total retail sales financed by credit increased from 10 percent in 1910 to 15 percent in 1927 to 50 percent in 1929. Because 71 percent of households stood on or below the poverty line during that decade, the ratio of household debt to household income rose steadily through the 1920s. In 1923, 1924, 1924, 1927 and 1928, the ratios stood at, respectively, 13, 18, 22, 25 and 31 percent. That most working-class households were in penury during these years was disguised by the supplementing of poverty-level wages with mounting debt. When debt rises faster than income the debt must be unsustainable. When the limits of household debt were reached around 1926, the especially rapid rise in the production and consumption of durable goods that propelled the decade’s growth rates could not be maintained. By 1929 there was a troubling decline in investment and in the demand for types of durable goods most responsible for the post-1921 growth surge. The stage was set for the Great Depression.
A similar scenario characterized the Golden Age. In 1946 the ratio of household debt to disposable income stood at about 24 percent. By 1950 it had risen to 38 percent, by 1955 to 53 percent, by 1960 to 62 percent, and by 1965 to 72 percent. The ratio fluctuated from 1966 to 1978, but the stagnation of real wages which began in 1974 pressured households further to increase their debt burden in order to maintain living standards, just as they had done during the 1920s, pushing the ratio of debt to disposable income to 77 percent by 1979. By the mid-1980s, with neoliberalism in full swing and wages continuing to stagnate, the ratio began a steady ascent, from 80 percent in 1985 to 88 percent in 1990 to 95 percent in 1995 to over 100 percent in 2000 to 138 percent in 2007. When the housing bubble first showed signs of leakage in 2006, the percentage of total household debt consisting of mortgage debt rose from 68 to 76 percent. As debt rose relative to workers’ income, households’ margin of security against insolvency began to erode. The ratio of personal saving to disposable income under neoliberalism began a steady decline, falling from 11 percent in 1983 to 2.3 percent in 1999. There followed the burst of the housing bubble and a dramatic decline in working-class living standards in the Great Recession.
While in America household debt accumulation has been necessary to provide the appearance of prosperity, it has never been sufficient. So deep-seated is American capitalism’s tendency to stagnation that federal deficits have been necessary to avert economic crisis. For almost all of its history the U.S. has run deficits; they have been and remain the norm. There have been only seven historical U.S. attempts to balance the budget and reduce the national debt. Each has resulted in depression or Great Recession. The first six attempts (1817-21, 1823-36, 1852-57, 1867-73, 1880-93 and 1920-30) were quickly followed by depressions. The seventh, Clinton’s 1998-99 surplus, was followed by a crash eight years later. The delay was effected by a historic boost to demand provided by the unprecedented household credit explosion of the late 1990s up to the crash of September 2008.
An exhaustive study released by the National Bureau of Economic Research analyzed 138 years of economic history in 14 advanced capitalist economies. It concludes that a major cause of severe economic downturns is high levels of private debt. (6) Michael Hudson has made a powerful case for the re-emergence of debt peonage as the chronic condition of the working class absent profound structural political-economic change. In my forthcoming (June) book Overripe Economy American Capitalism and the Crisis of Democracy, I discuss the features of the historical evolution of U.S. capitalism that have led to the current settlement, the major transformations now under way, and what a genuinely democratic political economy must look like.
(1) Lawrence F. Katz and Alan B. Krueger (2016). “The Rise and Nature of Alternative Work Arrangements in the United States, 1995–2015,” Princeton University and NBER. March 29. (2) Scott Fullwiler, Stephanie Kelton, Catherine Ruetschlin and Marshall Steinbaum, “The Macroeconomic Effects of Student Debt Cancellation,” February, 2018 Levy Economics Institute of Bard College
(3) “A Pound of Flesh The Criminalization of Private Debt” 2018 American Civil Liberties Union
(4) “The Macroeconomic Effects…,” pp. 18-35
(5) “The Macroeconomic Effects…,” pp. 46-49
(6) Alan Taylor, “The Great Leveraging,” Working Paper 18290 National Bureau of Economic Research