Monday, December 27, 2021

Why Doesn't the Federal Government Just Cancel All Student Debt? To Find the Answer, Take a Look at Our National Balance Sheet

 When Joe Biden was running for President, he said he would cancel $10,000 of every college borrower's student debt if Congress consented. But Congress hasn't acted.

Senators Elizabeth Warren and Charles Schumer have urged President Biden to cancel $50,000 of every borrower's federal student loans, saying he has the executive power to do so. But that hasn't happened either.

Why not? Given the hardship that student debtors are experiencing--especially since the COVID crisis began--why not just wipe the slate clean and cancel all $1.7 trillion in federal student debt?

In my opinion, President Biden and most members of Congress would like to cancel all student debt. After all, there are about 45 million student borrowers, and canceling their student loans would make them all very happy. 

But Congress can't do that, and neither can President Biden. And here's why.

Student loans are carried on the nation's balance sheet as assets. As of September 30, 2020, the United States held almost $6 trillion in assets, and about a quarter of that amount is listed as outstanding student loans. 

As of September of last year, total national liabilities amounted to roughly $32 trillion, resulting in a national debt of around $26 trillion (give or take a few trillion).

Thus, if Congress simply wiped out all those student loans or President Biden canceled them through executive action, the nation's balance sheet would look significantly worse than it already does.  Instead of holding total assets of $6 trillion, our government would have only a little more than $4 billion.

Simply put, the federal government pretends that all that student-loan debt--closing in on $2 trillion--will be paid back.  And that fiction cannot be maintained if Congress wipes out all student debt or allows large numbers of distressed debtors to discharge their student loans in bankruptcy 

If you are a student-loan debtor, you have benefited from the moratorium on making monthly loan payments--a moratorium that won't be lifted until May 2022.

But just because you haven't made any student-loan payments over the past two years, don't get your hopes up that Congress will simply forgive all federal student debt.  It won't do it because it can't do it. The Federal government's balance sheet simply can't take the hit.


  1. The National Debt stopped being relevant as soon as Nixon took us off the gold standard. The government creates USD and the only limit on how many it creates is inflation.

  2. Technically you are correct about the wiping out of assets. (The Feds only own about 85-90% of student debt, and guarantee the rest, but that is not material here.)

    On this issue I stand with the Bernie Sanders wing, the so-called Modern Monetary Theorists. Their response here is that if $24 trillion in debt does not stop the world from lending to the USA at lower interest rates, then $26 trillion is not going to stop them either.

    In other words, the world does not look at the USA in the same way that a bank looks at a small business owner who comes in for a loan.

    I am aware that this could all change very fast. Maybe the worsening balance sheet from student loans will be the trigger for a debt crisis.

    Remember it was Dick Cheney who said that "Deficits don't matter," and I am sure that Donald Trump said the same thing in private.

  3. Yes, Bob Hertz. But does the Debt Ceiling play any role in this scenario?

    But I do know that McKinzie Consultants were brought in by Trump to appraise the securitization potential of the student debt portfolio, and WSJ (from yet another study) determined that $500 billion of the $1.7 trillion will never be repaid any way that you look at it. No bank or fintech would touch this, like kryptonite. When I FOIA'd the study, I was given 200 pages that were redacted based on "trade-secrets" exemptions. LOL! Congress also asked for a copy. I suppose that they received the same thing that I did.

  4. Hi, Bob.

    I agree that the conventional wisdom is that debt doesn't matter so long as the U.S. dollar remains the world's reserve currency.
    But inflation could threaten the status of U.S. debt. It is conceivable that the Chinese yuan will become the world's reserve currency. Until recently, I saw the student loan crisis as a boutique problem that is not significantly linked to the national economy. But when a quarter of our national assets are (mostly) worthless student loans, the student loan program impacts the American economy. And I don't see any clear way to diminish the coming crisis. The colleges have to have all that federal money to operate.

  5. Good points.

    Seems to me that this asset in accounting terms -- student loans -- requires the government to squeeze its own citizens for interest and principal repayments.

    T'aint much of an asset, I would say. The greatest real asset of a nation is the entrepreneurial energy and creativity of its people. If the $2 trillion in loan assets is dragging down the real asset of energy, let go of the loan.

  6. Great blog post and associated discussion. I think politicians need to be real clear with their constituents regarding the forgiveness of student loans. Not gonna happen. Interesting to see what will happen as a result - lower birth rate because people can't afford to have children? Women can't quit their jobs to stay at home? Can't afford childcare because of your student loan? Can't buy the big boomer's houses because they cost too much? Boomers can't retire because no one can afford their homes (their anticipated retirement nest egg). Rent prices increase. Less children equals less people paying into social security. People not retiring due to student loan debt....the possibilities are endless and not good in any shape or fashion.