Homer: And you didn’t think I’d make any money. I found a dollar while I was waiting for the bus.
Marge: While you were out “earning” that dollar, you lost 40 dollars by not going into work. The plant called and said if you don’t come in tomorrow, don’t bother coming in Monday.
Homer: Woohoo! A four-day weekend!
— The Simpsons, “Lisa’s Rival”
Observers of the student debt bubble quickly point out that the Department of Education expects to make a gross recovery of $1.02 to $1.22 on every dollar of defaulted loans, and when collection costs are included, the net recovery is 85¢ on the dollar. This, of course, is madness, especially when credit card defaults give the creditors a more realistic 10¢ on the dollar. Often, debtors pay off some student debt before going into default, so the 85% recovery only applies to the remaining balance. The government can often make a profit anyway. According to the Wall Street Journal:
[T]he government stands to earn $2,010.44 more in interest from a $10,000 loan that defaulted than if it had been paid in full over a 20-year term, and $6,522.00 more than if it had been paid back in 10 years.
FOX Business blithely asks, “Default Rates Climbing for Student Loans: Who Pays?”
[A]ccording to government officials [WHO???], the default rates should not cause alarm, as they argue the profits brought in from student-loan programs more than offset the balance on loans that went under.
Picking on FOX isn’t particularly challenging (though its business channel is milder and gets credit for quoting the Chronicle of Higher Education’s Kelly Field), but combined with the WSJ article above, its sentiment isn’t as uncommon as one might think: Some loans are going into default, the government isn’t losing much money on them, and even if it is, the profits from the rest of the system make up for it. Everything’s fine; borrow responsibly.
First, the default rate is higher than the media realize because the DoE only tracks defaults that occur two years into repayment rather than defaults system-wide. As Alan Collinge ominously puts it, though using outdated data:
Based on Inspector General Data initially reported on by Nick Perry of the Seattle Times, and in view of recent 5-year default data, We are confident that the true default rate across all federal student loans is between 25 and 33 percent (perhaps even greater) – clearly higher than described in the Chronicle article, and higher even than the default rate for sub-prime home loans, payday loans, credit cards, or any other lending instrument in this country.
Second, we turn to the Simpson’s exchange that pops into my mind whenever I think of opportunity costs in economics. When people are forced to repay a loan rather than save money or spend it on consumer goods, they’re not contributing to economic growth. They’re also discouraged and often barred from fully participating in the labor force, which means they’re highly unproductive too.
If the government claims the system is working well overall and taxpayers aren’t losing their shirts, it should compare its student loan “profits” to the lost tax revenue from zombie debtors. Money going to the DoE is the dollar that Homer Simpson found; the federal government lost more in potential tax dollars and overall economic growth by standing at the bus stop than by accepting the fact that an uneducated productive workforce is better for everyone than an educated (if that) unproductive one. The situation benefits no one, and as a result that underused indicator of economic unhealth, the ratio of total economic debt to GDP, rises.
The obvious solution is to rescue student debtors and do a 180 on student lending laws and the bankruptcy code, for bankruptcy redistributes capital from unproductive uses to productive ones. See, that’s what makes capitalism better than feudalism. Astonishingly, debt peonage injustices the scope of the consequences. There’s a word for what happens when people are forced to pay down debt instead of saving or spending money: Disinflation.
If only we could give FOX Business’s government officials a “four-day weekend.”