The Fed, Student Debt and How to Fund a Student Jubilee

[Jamie Walton]

The Fed, Student Debt and How to Fund a Student Jubilee

By Jamie Walton, with contributions from AMI conference and Google Group participants
(go to: https://groups.google.com/forum/?hl=en#!forum/the-american-monetary-institute)

October 27, 2014

The Fed (the Federal Reserve System) consists of the Board of Governors in Washington D.C. (which is a federal government agency) and the 12 regional Federal Reserve Banks (which are “nongovernmental organizations, set up similarly to private corporations”1).

The Federal Reserve Banks hold bank accounts for U.S. banks2 and other U.S. financial institutions, as well as for foreign banks, foreign central banks, and international financial institutions. These bank accounts are treated as liabilities of the Federal Reserve Banks (as are Federal Reserve notes circulating outside the Federal Reserve System’s vaults).

The Fed’s bank accounts (and notes) are treated as liabilities of the Fed because they are regarded as the Fed’s promises to pay money. What money? In the case of the Fed’s bank accounts, Fed notes, or U.S. coins (and in the case of Fed notes, ... Fed notes, or U.S. coins). Of course, banks don’t want to hold more Fed notes and U.S. coins than their customers might want to hold, so banks keep most of their “money” with the Fed in bank accounts at Federal Reserve Banks (most of it in what are called “reserve” accounts). 

To match the Fed’s liabilities, the Fed holds a portfolio of financial and other assets called the “System Open Market Account” (SOMA), managed by the Federal Reserve Bank of New York. The SOMA assets are mainly U.S. Treasury securities, and more recently, as part of so-called “Quantitative Easing” (QE), mortgage-backed securities (MBS). The Fed acquires these assets by creating numbers in the reserve accounts of the banks of the sellers of the assets (in essentially the same way as banks create numbers in the deposit accounts of the customers who borrow from them, or sell assets to them).

As well as managing the Fed’s SOMA portfolio, the New York Fed collects and analyzes various economic data. One of the topics it keeps tabs on is student debt.

Student Debt

It’s within the living memory of most Americans when there were essentially no tuition fees for attending public colleges and universities. Since then fees have grown and grown and this has forced students to go into debt to pay for their studies.

The New York Fed reports that student debt is the only kind of debt that has continuously risen during the recession and its level is now second only to mortgage debt, and this is reducing students’ ability to participate in the economy (e.g., buying cars and homes).3 

Student debt is putting our best and brightest behind the 8-ball of debt before they even start - even Forbes is expressing concern that student debt is crippling the U.S. economy.4 It should be obvious that this situation cannot go on indefinitely.

To solve the student debt crisis we need to fully fund our education system all the way from pre-K to post-secondary. The National Emergency Employment Defense (NEED) Act provides for investment priorities in Title V, including for education in Section 505:

“SEC. 505. EDUCATION FUNDING PROGRAM. 
Before the end of the 120-day period beginning on the date of the enactment of this Act, the Secretary, in cooperation with the Secretary of Education, shall provide recommendations to the Congress for a program to help fund our educational system that will put the United States on par with other highly developed nations, and to sufficiently provide for universal pre-kindergarten, fully funded State programs for elementary and secondary education and universal college at every 2- and 4-year public institution of higher learning and create a learning environment so that every child has an opportunity to reach their full educational potential.”

The NEED Act provides us with the means to provide the extra funding needed to achieve a free at source education system so that nobody has to go into debt to get the education our modern economy needs. See here for more background and explanation.

How to Fund a Student Jubilee

What is a Student Jubilee? 

It is a way of saying that post-secondary education is a public good and as such should never have been charged to students, so students should never have had to go into debt to pay for it, and so we are going to clear the students of that debt so that graduates can get on with their lives and contribute to society without that burden of debt.

The Institute for College Access & Success (TICAS) identifies a way in which student debt can be cancelled (“forgiven”) by having the federal government pay for it and not count it as taxable income.5 

The NEED Act provides the means to be able to clear all student debt in this way without affecting the federal budget - i.e., without taking any money from taxing or borrowing, and without inflation. Because the NEED Act treats money as money, not as a promise to pay money, all money in bank accounts, including Federal Reserve Bank accounts, becomes held in trust in custodial accounts that are not liabilities on the balance sheet. Thus the $4.2 Trillion of SOMA assets are no longer required and can be auctioned and the proceeds can be recycled back into the economy to pay off all of the ~$1.0 Trillion of student debt and still have $3.2 trillion left over for other purposes (e.g., a one-off citizens dividend). There’s no inflation because existing money is being used to pay the debt.

Footnotes: 
1 Federal Reserve Bank of San Francisco, What is the Fed: Structure, retrieved October 13, 2014: http://www.frbsf.org/education/teacher-resources/what-is-the-fed/structure 
2 The term “bank” in this article includes all types of depository institutions, e.g., thrifts, credit unions, etc. 
3 Federal Reserve Bank of New York, Student Debt Overview, retrieved October 13, 2014: http://www.newyorkfed.org/regional/Brown_presentation_GWU_2013Q2.pdf 
4 “How The $1.2 Trillion College Debt Crisis Is Crippling Students, Parents And The Economy” Forbes, 8/07/2013 @ 12:30PM, retrieved October 27, 2014: http://www.forbes.com/sites/specialfeatures/2013/08/07/how-the-college-debt-is-crippling-students-parents-and-the-economy/
5 The Institute for College Access & Success, The Project on Student Debt; Real Loan Forgiveness, retrieved October 27, 2014: http://projectonstudentdebt.org/initiative_view.php?initiative_idx=8

[sdkkwolfe]

On Monday, October 27, 2014 10:20:37 PM UTC-4, Jamie Walton wrote:
> The Fed, Student Debt and How to Fund a Student Jubilee
> By Jamie Walton, with contributions from AMI conference and Google Group participants
> (go to: https://groups.google.com/forum/?hl=en#!forum/the-american-monetary-institute)
> October 27, 2014
> The Fed (the Federal Reserve System) consists of the Board of Governors in Washington D.C. (which is a federal government agency) and the 12 regional Federal Reserve Banks (which are “nongovernmental organizations, set up similarly to private corporations”1).
> The Federal Reserve Banks hold bank accounts for U.S. banks2 and other U.S. financial institutions, as well as for foreign banks, foreign central banks, and international financial institutions. These bank accounts are treated as liabilities of the Federal Reserve Banks (as are Federal Reserve notes circulating outside the Federal Reserve System’s vaults).
> The Fed’s bank accounts (and notes) are treated as liabilities of the Fed because they are regarded as the Fed’s promises to pay money. What money? In the case of the Fed’s bank accounts, Fed notes, or U.S. coins (and in the case of Fed notes, ... Fed notes, or U.S. coins). Of course, banks don’t want to hold more Fed notes and U.S. coins than their customers might want to hold, so banks keep most of their “money” with the Fed in bank accounts at Federal Reserve Banks (most of it in what are called “reserve” accounts). 
> To match the Fed’s liabilities, the Fed holds a portfolio of financial and other assets called the “System Open Market Account” (SOMA), managed by the Federal Reserve Bank of New York. The SOMA assets are mainly U.S. Treasury securities, and more recently, as part of so-called “Quantitative Easing” (QE), mortgage-backed securities (MBS). The Fed acquires these assets by creating numbers in the reserve accounts of the banks of the sellers of the assets (in essentially the same way as banks create numbers in the deposit accounts of the customers who borrow from them, or sell assets to them).
> As well as managing the Fed’s SOMA portfolio, the New York Fed collects and analyzes various economic data. One of the topics it keeps tabs on is student debt.
> Student Debt
> It’s within the living memory of most Americans when there were essentially no tuition fees for attending public colleges and universities. Since then fees have grown and grown and this has forced students to go into debt to pay for their studies.
> The New York Fed reports that student debt is the only kind of debt that has continuously risen during the recession and its level is now second only to mortgage debt, and this is reducing students’ ability to participate in the economy (e.g., buying cars and homes).3 
> Student debt is putting our best and brightest behind the 8-ball of debt before they even start - even Forbes is expressing concern that student debt is crippling the U.S. economy.4 It should be obvious that this situation cannot go on indefinitely.

> To solve the student debt crisis we need to fully fund our education system all the way from pre-K to post-secondary. The National Emergency Employment Defense (NEED) Act provides for investment priorities in Title V, including for education on Section 505:

> “SEC. 505. EDUCATION FUNDING PROGRAM. 
> Before the end of the 120-day period beginning on the date of the enactment of this Act, the Secretary, in cooperation with the Secretary of Education, shall provide recommendations to the Congress for a program to help fund our educational system that will put the United States on par with other highly developed nations, and to sufficiently provide for universal pre-kindergarten, fully funded State programs for elementary and secondary education and universal college at every 2- and 4-year public institution of higher learning and create a learning environment so that every child has an opportunity to reach their full educational potential.”
> The NEED Act provides us with the means to provide the extra funding needed to achieve a free at source education system so that nobody has to go into debt to get the education our modern economy needs. See here for more background and explanation.
> How to Fund a Student Jubilee
> What is a Student Jubilee? 
> It is a way of saying that post-secondary education is a public good and as such should never have been charged to students, so students should never have had to go into debt to pay for it, and so we are going to clear the students of that debt so that graduates can get on with their lives and contribute to society without that burden of debt.
> The Institute for College Access & Success (TICAS) identifies a way in which student debt can be cancelled (“forgiven”) by having the federal government pay for it and not count it as taxable income.5 
> The NEED Act provides the means to be able to clear all student debt in this way without affecting the federal budget - i.e., without taking any money from taxing or borrowing, and without inflation. Because the NEED Act treats money as money, not as a promise to pay money, all money in bank accounts, including Federal Reserve Bank accounts, becomes held in trust in custodial accounts that are not liabilities on the balance sheet. Thus the $4.2 Trillion of SOMA assets are no longer required and can be auctioned and the proceeds can be recycled back into the economy to pay off all of the ~$1.0 Trillion of student debt and still have $3.2 trillion left over for other purposes (e.g., a one-off citizens dividend). There’s no inflation because existing money is being used to pay the debt.
> Footnotes: 
> 1 Federal Reserve Bank of San Francisco, What is the Fed: Structure, retrieved October 13, 2014: http://www.frbsf.org/education/teacher-resources/what-is-the-fed/structure 
> 2 The term “bank” in this article includes all types of depository institutions, e.g., thrifts, credit unions, etc. 
> 3 Federal Reserve Bank of New York, Student Debt Overview, retrieved October 13, 2014: http://www.newyorkfed.org/regional/Brown_presentation_GWU_2013Q2.pdf 
> 4 “How The $1.2 Trillion College Debt Crisis Is Crippling Students, Parents And The Economy” Forbes, 8/07/2013 @ 12:30PM, retrieved October 27, 2014: http://www.forbes.com/sites/specialfeatures/2013/08/07/how-the-college-debt-is-crippling-students-parents-and-the-economy/
> 5 The Institute for College Access & Success, The Project on Student Debt; Real Loan Forgiveness, retrieved October 27, 2014: http://projectonstudentdebt.org/initiative_view.php?initiative_idx=8

The Fed, Student Debt and How to Fund a Student Jubilee,
nicely done Jamie! Will the Student Jubilee include debt relief for those students that have already graduated and have existing student debt? What about those that have just paid off their loans in the last year? The last five years? It would be nice to also include debt relief for these students. Perhaps cover all existing student debt for those that have paid of their debt In the last ten years and a percentage thereafter?

[Jamie Walton]

Dear all, we want to get a conversation going about this very topical issue.  There are many things to discuss:

Please send us your ideas on the best and fairest way to implement a student debt jubilee, to reflect that the NEED Act fully funds pre-K to 2- and 4-year post secondary public education going forward, and can in effect back-date this with the student debt jubilee as though free education had always been available (like in Denmark, Germany, etc.).

E.g.: 

- How do we make it fair for military personnel who have had to serve in the military to get access to their free education, etc.?

- If people choose to go to a private education provider, should they get the equivalent amount student debt forgiven as they would have had if they had gone to a public education provider?

- Etc.

Thanks to those of you who have sent feedback already.  Please restate your feedback here.  Let's get this thread going and growing please.

Best regards to all,

Jamie Walton

[Jamie Walton]

Thanks Doug,

Great to hear from you, hope you are well.

Yes, great questions, and we want thoughtful contributions to help us develop this important theme.

To answer your first question, traditionally (and more recently), the word "jubilee" implies "debt relief for those students that have already graduated and have existing student debt" so the question then is your next question: 

"What about those that have just paid off their loans in the last year? The last five years? It would be nice to also include debt relief for these students. Perhaps cover all existing student debt for those that have paid of their debt In the last ten years and a percentage thereafter?" 

I sort of implied this when I wrote: "It is a way of saying that post-secondary education is a public good and as such should never have been charged to students, so students should never have had to go into debt to pay for it, and so we are going to clear the students of that debt so that graduates can get on with their lives and contribute to society without that burden of debt."

There must be a precedent for this kind of situation.  If anybody knows of an applicable historical example, please bring it into the conversation here.

Thanks,

Jamie Walton

[sdkkwolfe]

Student Jubilee 101.

In rethinking the Student Jubilee, here are a few more thoughts and additions. They may change as we all try and figure this out.

First off, the Student Jubilee should be offered to all citizens attending U.S. schools.
As long as the individual is alive, there should be 100% reimbursement for educational expenses. This would include a person taking just one class or going to a trade school. It matters not if the individual goes to a private or public education provider. The standards for enrolment are much higher for many of the private schools. The benefits provided to society by allowing people to freely choose their school of choice, will far surpass the benefits to society than by adding restrictions to one's choices. This is because students are striving to better themselves. This attitude will uplift society as a whole. This is especially true if the desire is to help others. The thrust of this program, the Student Jubilee should be sold as a way to unite all people towards the Fraternity of Man (Fraternity of Life).

Student Jubilee reimbursement would include all school related expenses. Tuition, housing, books and supplies, food and transportation. The housing subsidy would be equivalent to what the school being attended charges should they decide to live off campus. As for transportation cost, it should be a fixed amount per month, at least enough for public transportation. It may be used for maintenance, gas and insurance if the individual owns a car.

The Student Jubilee will help uplift our country. The benefits that a person gains by going to school will only further society, especially when these individuals give something in return. Perhaps students receiving the Student Jubilee should be required to do community service, equivalent to maybe double their credit hours of study. As an example, 20 credit hours of classes would equal 40 hours of community service.

I don't know much about the military and their benefits to the enlisted men and women they offer in regards to education. I think they should get all the benefits mentioned above. Also, because they have served their time, they would be exempt from community service. Perhaps they could be supplied a vehicle in addition to what was outlined earlier.