Economy

The Student Debt Slowdown: An Overhang of $1.4 Trillion

By Charles Sizemore  |  July 1, 2019

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

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. Along with a few other heavy-hitters and a couple of folks who suffer and support the idea of debt forgiveness, they covered all bases on this “plague” in America.

Now, I’m not a fan of bailouts. I wasn’t a fan of the banks getting bailed out back in 2008. 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. Universities irresponsibly raised tuition prices to unaffordable levels knowing that students could always borrow whatever they lacked, and students gladly — thoughtlessly — racked up the debt without bothering to consider their real potential post-graduate earning power.

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…

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.

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 ostensible 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-yielding stocks and other securities that benefit from a low-inflation environment makes sense. And in Peak Income, that’s exactly what the focus is — growth over time and a steady flow of income, regardless of the markets and the economy. It’s the kind of strategy that pays well in the long run and judging how things could slowdown much more significantly… well, you get the picture. Click here to learn more.

Charles Sizemore

Income and Retirement Strategist, Charles Sizemore, CFA specializes on dividend-focused portfolios and building alternative allocations by finding value opportunities outside of the mainstream stock market.

Charles is the executive editor and portfolio manager for Dent Research's premium newsletters, Peak Income and Peak Profits.

He is also a frequent guest on CNBC, Bloomberg TV, Fox Business News and Straight Talk Money Radio, and has been quoted in Barron’s Magazine, The Wall Street Journal, and The Washington Post. He is a frequent contributor to Forbes, GuruFocus, MarketWatch and InvestorPlace.com.

Charles holds a master’s degree in Finance and Accounting from the London School of Economics in the United Kingdom and a Bachelor of Business Administration in Finance with an International Emphasis from Texas Christian University in Fort Worth, Texas, where he graduated Magna Cum Laude and as a Phi Beta Kappa scholar. MORE FROM AUTHOR