The Economist - 02.22.2020_

12 Leaders The EconomistFebruary 22nd 2020

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merica’stotalstudentdebt,atover$1.5trn,islargerthan

thenationalborrowingofmostcountries.Ithasquintupled

insizesince2004,overtakingbothborrowingoncreditcards

andcarfinance.Thisgrowthisoftenpresentedasevidenceofa

crisis.Buttheriseintotaldebt,thougharresting,isnotthereal

problem.It largelyreflectsincreasedborrowingbygraduatestu-

dents,suchasbuddinglawyers,whowillgoontobehighearn-

ers.And92%ofstudentdebtisowedtothefederalgovernment,

meaningdefaultsposenorisktothefinancialsystem(seeFi-

nancesection).Therealproblemisthat11mAmericans,many

poorandnon-white,andmanydupedintostudyingforworth-

lessdegrees,struggletorepayevenmodestdebts.

SomeDemocraticcandidatesforpresidentseemnottoknow

this.BernieSanders,thefront-runner,wantsto

cancelallstudentdebt—ahandoutthatwould

indeedproviderelieftothosewhoare strug-

gling,butwouldalsoofferanenormouswind-

falltothewell-off.ElizabethWarrenwouldcan-

cel all debt up to $50,000, a policythat is

similarlyindiscriminate.ThankfullyJoeBiden

andMikeBloomberg,whoannouncedhisstu-

dent-debtpolicyonFebruary18th,haveplans

thatarebettersuitedtotheproblem.

MessrsBidenandBloombergwanttoputallexistingandnew

borrowersforundergraduatedegreesintoanincome-linkedre-

paymentscheme,underwhichborrowersmustrepayonlya

fractionoftheirannualearningsabovea certainthreshold.The

Economisthaslongarguedinfavourofsucha repaymentmecha-

nism,whichworkswellinBritain.Linkingrepaymentstoin-

comemakesitimpossibletobeimpoverishedbystudentdebt,

andfreesgraduatestotakerisksearlyintheircareers.

Americaalreadyhasincome-linkedrepaymentschemesfor

distressedborrowers,buttheyareflawed.Theearningsthres-

holdsatwhichrepaymentsbeginaretoolow:typicallyaround

$18,000,comparedwith£26,000($34,000)inBritain.Theinter-

estrates,whicharetypicallyaround6%,areunjustifiablyhigh

forborrowingfromthegovernment.Andtheschemesareanad-

ministrativenightmare.Studentsmustchoosefromoneoffour

optionsandfilloutnewpaperworkeveryyeartoavoidpenalties.

Anyoutstandingdebtisforgivenafter 20 or 25 years,butdebt-

forgivenessistaxable,puttingstrugglingdebtorsatthemercyof

theInternalRevenueService.

By enrolling everyone automatically, Mr Biden’s and Mr

Bloomberg’splanswouldgreatlyimprovethestatusquo.Both

wouldcutrepaymentsfrom10%ofincomeabovethethreshold

to5%,lesseventhanintheBritishsystem.MrBidenwouldraise

therepaymentthresholdto$25,000andmakealldebtforgive-

nesstax-free.MrBloombergwouldforgivedebtthatwasin-

curredatfailedorpredatoryfor-profituniversi-

tiesandexemptdebtforgivenessupto$57,

fromtax.Bothcandidatesshouldalsoconsider

cuttingthehighrateofinterest.

Makingstudentloanslessonerousforbor-

rowersisonlyhalfoftheremedy,however.Con-

gressshouldalsoclampdownonlow-quality,

for-profitcolleges.Theseinstitutionsdepend

almost entirely on federal student loansfor

theirrevenues,chargethehighestpossiblepricesandmarket

themselvesaggressively.Whenstudentsgraduateandcannotre-

paytheirdebts,thetaxpayerfootsthebill.BarackObama’sWhite

Housetriedtoreinthesecollegesin,butDonaldTrump’shas

loosenedtherules.AlltheDemocraticcandidatesrecognisethis

problem.Republicansaresupposedtobesuspiciousoffeeding

frenziesatthegovernmenttrough,buttheyareindenial.

A reformagendamightalsoincludethefederalgovernment’s

lendingtograduatestudents.Unlikethattoundergraduates,this

isunlimited.Thoughnota largesourceofdebtdistress,it maybe

fuellinga pointlessandcostlyarmsraceamongtheaffluent.

Governmentshavea partinhelpingfinancehighereducation,

butwell-meaningpolicycanoftengobadlywrong. 7

Getting the maths right

UnitedStates

Studentdebt,%ofGDP

0

2

4

6

8

2006 10 15 19

How to fix America’s student-finance problem

Student debt

F

ew post-wareconomic institutions have been as successful

as the Bundesbank. Its tough stance on inflation in the 1970s

ensured that, while the world battled double-digit price rises,

those in Germany were relatively contained. Its credibility with

the public and markets was so strong that other countries were

keen to harness its might, leading to the creation of the single

currency in 1999. Jacques Delors, a European politician, once

joked not all Germans believe in God, but they all believe in the

Bundesbank. Others in Europe were ready converts, ceding mon-

etary sovereignty to the European Central Bank (ecb), which is

based in Frankfurt, and was at first heavily influenced by German

economic doctrine.

The Bundesbank has a distinct role and identity—it repre-

sents Europe’s biggest economy at the ecb, runs payments sys-

tems, operates in the bond markets and continues to be admired

by most Germans. But relations with the ecb have soured, partly

as a result of the euro-zone sovereign-debt crisis. After 2011 influ-

ence gradually drained away from the Bundesbank and power

became concentrated under Mario Draghi, then president of the

ecb (see Finance section). His successor, Christine Lagarde,

wants a fresh start. Both sides need to make up. If they do not,

they risk a botched response to the next recession and a deadly

Couples therapy

The euro zone’s two big hitters have fallen out. They should make up before the next recession hits

The Bundesbank and the ECB