Do you remember where you were when you applied for your college loans? I do. I’d already arrived in Vermont for my first semester of an MFA program, but when the time came to sign my forms I felt overwhelmed by anxiety. I knew that a Master of Fine Arts – in fiction writing of all things – was for people with money to burn. It wasn’t the sort of degree that you pursued on credit, especially if you’d just finished paying your undergrad loans and didn’t have a co-signer. Doctors, lawyers, and engineers take out huge sums for grad school. Not would-be novelists. And yet… I signed. Believing (as I still do) that it was the best path for me to chase my dreams. * * * “Where did they think you’d get the money to pay them back?” asks Thad Beversdorf, over the phone. Thad is a finance professor at Marquette University and the founder/CEO of SpendIndie.com. “That’s the thing: They knew you wouldn’t be able to. Any economist will tell you that.” He’s not saying that the government doesn’t want us all to pay back our loans. The companies who service our debt will chase us to the literal ends of the earth to make sure that we do. But Beversdorf has made it his mission to help people understand that the financial transaction between the federal government as lender and we-the-broke-borrowers is a bit more complicated than it initially seems. MISUNDERSTANDING THE POINT OF COLLEGE LOANS “Every dollar printed by the Fed comes with a cash component and a debt component,” Beversdorf explains. “It’s the way our system is structured.” Throughout the college loan boom – from roughly 1995 to present – corporations have often seen consumer spending falter, especially in key segments (like brick and mortar apparel). Wages have failed to keep pace with costs like healthcare, housing, and education, and people have less disposable cash on hand. Though GDP has steadily risen, money has been vacuumed out of the system by the 1% via stock dividends and buybacks. As a result, the economy is left competing with the stock market for a finite amount of capital. So what happens when there’s less cash in circulation? The same thing that happens when you and 98 friends only have one pizza to split because one dude is hoarding twenty pizzas to himself — every bit becomes more precious and people are less likely to part with their share. When consumers are hesitant to spend, it has the potential to affect retail tremendously. Meanwhile, the cost of college has outpaced the growth of financial aid. These two seemingly disparate elements (lack of consumer spending and the student need to pay for college) fit together neatly — with the help of a financial instrument that’s grown both popular and necessary in recent decades: School loans.

“By printing money, the Fed was able to bolster consumer markets,” Beversdorf says. “Much of it through $1.5 trillion in student loans. Corporations were the big winner as those loans provided the cash to support growth. It was a free corporate bailout.” Through loans, the debt was transferred to consumers. In this case a very reckless brand of consumers: College kids eager to buy beer, clothes, makeup, etc. And what did they find after graduation? A job market that had continued to weaken and was not particularly interested in their undergraduate degrees. They had gained skills, to be sure, but not enough to make them “in demand” in the workplace. “The labor market is not characterized by a skills gap,” Marshall Steinbaum wrote for the Levy Institute earlier this year, in a paper modeling comprehensive student loan debt forgiveness. “The idea that it was, and that it could be solved by debt-financed higher education credentials, constitutes a macroeconomically significant misdiagnosis and false prescription.” Translation: A simple college degree doesn’t help you make enough money to excuse the money borrowed plus interest. This seems like a major oversight by the Fed — unless, as Beversdorf points out, closing a perceived “skills gap” wasn’t the sole point of issuing the loans. While he understands it might sound horribly jaded to claim that the whole purpose of creating more than a trillion dollars in debt was to shift the cost of a corporate bailout onto college kids, seeing these same loans only as an act of bank-God altruism feels deeply naïve. Especially when you consider the interest rates payees are on the hook for. WHY YOU PAY SO MUCH INTEREST “Since the bank bailout, the Fed, through its primary dealers, has loaned corporations trillions of dollars at artificially low interest rates,” Beversdorf says. “The hope was corporations would invest in business expansion here in the US but ultimately those low-cost loans were distributed directly to shareholders. Meanwhile, you’re paying… what? Eight percent after fees?” He’s right. My blended interest rate after servicing fees is right around 8.2% over the current life of my loans. So it’s easy for me to reject the idea of the government as a benevolent force for students, especially knowing how much interest banks are currently making just off holding excess cash reserves for the Fed (12 billion!). As always, Beversdorf says, the key here is to follow the money. If you use the accounting methods prescribed by the Federal Credit Reform Act of 1990 (FCRA), college loans create a budgetary surplus of $135 billion. But if you use the “Fair Value” method, that allows the government to carry the entire burden of risk and then accounts for potential defaults due to macroeconomic shifts, you get $88 billion in losses. While FCRA is what’s currently in place, even proponents of “fair value” recognize that — whether it creates a surplus or deficit — someone is making a lot of money on your student loans.

Who? Corporations like Navient. Big businesses that secure government contracts to manage student loans, add fees to the cost of the government interest rates (which are pegged to 10-year treasury notes), and will eagerly garnish your wages, snatch your tax returns, and forever burn down your credit if you try to default. Navient is also famously slick about hiding the best loan payback options, like income-driven repayment, and the details of loan forgiveness programs. The corporation (which, full disclosure, services my own loans) is currently being sued for deceptive business practices in California, Washington, Pennsylvania, and Illinois. In the cruelest twist of fate, Navient is a publicly traded company and issues stock dividends to shareholders every quarter — thereby removing more cash from our system, keeping wages stagnant, and causing the need for future student loans. THE CASE FOR ZERO PERCENT INTEREST Before we get into the zero-percent interest argument, it’s worth noting that the very idea of slicing interest rates of current loans (and future loans, until the system is restructured) down to zero is not the most radical proposition in circulation these days. Not by a long shot. Complete loan forgiveness has actually gained a fair bit of traction in economic circles. “I would point out,” Steinbaum writes, of the possibility of complete loan cancellation, “it amounts to around the same size in net dollar costs to the government as the recent tax giveaway to the rich, although with a very different beneficiary population. Hence, student debt cancellation would have a much better macroeconomic impact.” Why is it better to invest in students than the mega-rich? Besides need, the answer is simple: Students and 20-somethings tend to keep their money in the system (buying things, saving, splurging, etc.), vs. the 1% whose money is leveraged to extract even more cash from circulation (stocks purchased and subsequent stock dividends received, etc.). As Beversdorf explains, “Writing off those loans would actually complete the stimulus package that was started when the loans were issued. But, as the system currently stands, there would be too many strings attached for the ‘forgiven’ students – chains, really – to make it beneficial.” An even more wild idea is a mass refusal to pay on the part of 40 million students. The implausibility of this is demonstrated by the inability of any text chain of four or more people to agree on where to eat for dinner, but that hasn’t stopped economists from exploring the massive impact that such a default would create. This scenario, which is virtually impossible, would be so destructive to the economy that it would actually make the very best option for the government to take the hit on the more than 1.3 trillion in outstanding loans. Sure, it’s not gonna happen. But it’s fun to think, however fleetingly, that we, the people, have that sort of macroeconomic power, if we could just act in lockstep.