The Perils of Shifting Student Loan Debt

While I’m all for lowering student loan debt, especially since I have a lot of it myself, Wisconsin has an infinitely dangerous, and insane idea to reduce student loan debt; shift the debt to the state.

Here’s the way Wisconsin is planning it: A student wants to refinance his/her $50,000 student loan (pick a reason why, there’s many good ones). The state will buy the loan from the Federal Government. Then the student would owe the state at reduced interest rates. Sounds good for everyone; on the surface.

Then we find a devil in the details. How would the state buy loans from the Federal Government? By selling bonds to raise money.

Let’s start here – with Wisconsin’s current bond debt as a ratio of their tax revenue:


Right now, Wisconsin (like many other states) owes 34% of all the money they take in on bond debt. That means not only paying off the bonds, but paying interest as well. With adding bonds for student loans, it’s going to go much higher. Where will THIS money come from? Taxes is the only way any state gets its own money.

Let’s take a look at where Wisconsin plans to get their taxes from via the unemployment rate for the state:


6.9% is the U3 rate, which we know doesn’t measure much. Typically, raw unemployment is 4 times the U3 rate. That means that real unemployment is somewhere around 27% for Wisconsin. I’m not sure where they think they’re going to get tax revenue. Of course, we could use Wisconsin’s GDP – the amount of money produced in the entire state, which looks like this:


At a $2.6 Billion economy, Wisconsin makes up 17% of total national GDP, which is quite a bit. But it doesn’t mean that Wisconsin will actually be able to tap into any of that money – unless they raise taxes. Something they will have to consider since this bond issue will raise their debt to revenue ratio from 34% to somewhere north of that.

Wisconsin is staunchly red; they’re not going to be raising taxes anytime soon, so they’ll likely carry the debt to the breaking point.

And, it doesn’t address the larger issue:

Since 1990, according to the Department of Education, grant based programs versus tuition increases (including fees) have dropped 1:130. That means that for every dollar cut in grants for those that need them, there has been in increase in tuition and fees by $130.

Shifting debt from Point A to Point B doesn’t make the debt go away. More than that though, not have education as a human right is more perilous. Other OECD countries (such as the Eurozone) have education as a human right, and as such, provide funding for it. And by the way, almost every country in the Eurozone (plus Canada) has a better education system and graduation rate than the U.S.

Loans are not funding. Loans are credit. Credit is debt. And no matter who the state shoves the loans off to, the debt still comes back to the student in one form or another. So is the savings of a couple of percentage points worth the rise in taxes by a couple of percentage points to pay for bonds and interest on bonds? As opposed to addressing the larger issues?

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