I’m really not trying to start a debate, I just want to understand why there is a dilemma, and how exactly it would work if passed.
In: 4
The courts can either discharge the loans, meaning they tell the lendors that the creditors of such loans are not longer contractually obligated to pay them back, therefore caveat emptor. That means a significant loss of revenue for banking institutions, some of which will come out of insurance, the rest just goes up in smoke as it were. But it still means there’s a reduction in the gross money supply since banks then have to loan less to others while charging significantly higher interest rates. It would also cause a few institutions to go belly-up wiping out some of their customers investments, which isn’t great. This overall isn’t a great option since it’s likely to cause recession and reduction in corporate spending.
The federal government can also simply pay off the remaining loan balance by rolling it into the national credit card account, so to speak, i.e. the national debt. Now, when the federal student loans program was created, there were some legal framework to do this written and it was always assumed to be an option, meaning the federal government could guarantee the loans if individuals couldn’t pay them off. But the legal mechanisms haven’t been tested until the last 2 years.
National debt doesn’t work exactly the same economically as an individual debt. Explaining the differences is a bit. Suffice it to say it ends up being paid back by taxpayers both individual and corporate taxes, but the government sets some of the patback terms and can also do things to increase or decrease it’s buying power. However the caveat being that on a national level we are already collectively paying for it in the form of reduction in consumer disposable income, and by employees asking for higher wages, to a lesser extent. That is, higher labor costs and lower revenue.
Now, this isn’t exactly harmless either and it increases the supply of money in effect, which can cause inflation.
Latest Answers