I recently talked on my Fox Business show, Making Money with Charles Payne, about President Obama’s attempt to forgive student loan debt, and the topic generated a lot of discussion.
At this point, we don’t know whether his plan is to forgive all, some or none of the $1.3 trillion in outstanding student loan debt, but I think it is certainly worth discussing — in part because student loan forgiveness is an important issue, but also because what goes on in the White House affects people and their goal of making money.
Student loan forgiveness and the spike in student loans broadly have been a topic of conversation for years. As you can see in the chart below, the numbers have soared in the last five years, and the majority of millennials currently list student loans as the No. 1 thing holding them back from independent financial success.
Since he’s been in office, President Obama has made promises — and even pushed through several programs — to lower or forgive outstanding student loans. While it hasn’t taken this turn yet, I’ve always felt that these promises were stepping stones on the path to an executive order that will forgive every cent that students currently owe.
Personally, I find this notion troubling. Student loan forgiveness would cost American taxpayers hundreds of billions of dollars, and it would likely send already-high tuition skyrocketing.
The reason I’m bringing this up today is because early last week, U.S. Secretary of Education Arne Duncan announced that the Obama administration is in the process of developing a mechanism that will allow those students who took out loans to attend now-bankrupt Corinthian Colleges (COCOQ) to receive full forgiveness of their loans. According to estimates, this is going to cost taxpayers up to $3.5 billion, but this is a very small sum compared to what taxpayers could be on the hook for should these forgiveness acts truly take effect.
There’s little doubt that this is going to be the mechanism that’s used to forgive loans for both publicly traded and not-for-profit schools and even Ivy League colleges down the road.
But the problem is that once this mechanism is in place, it can be used for absolutely anything.
If this mechanism were to be used indiscriminately in the future to wipe away student debt, the risk to the stock market would systemic. Student loan forgiveness wouldn’t erupt to the same degree as the housing implosion because of how sliced mortgages were and the leverage associated with many of them.
That said, at $1.3 trillion in total and $800 billion directly on taxpayers’ shoulders, an avalanche of forgiveness would harm the economy, send tuition higher and upset markets.
The next potential shoe to drop would be auto loans, which are approaching $1 billion.
The bottom line for investors is that the market would stumble under such a scenario and potential domino effect, making it something we need to be aware of and keep an eye on.
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