It is obviously not a good time to raise interest rates on student debt, but they are set to double on July 1, 2012, to 6.8%. Many lawmakers in both parties agree that the current 3.4% rates should be extended for another year, but they can't agree on how to find the $6 billion that this would cost. Republicans want to take the money from a health-care fund that promotes preventive care; Democrats want to eliminate some tax benefits for small business owners.
Congress cannot agree on $6 billion to save the students, yet they managed to agree in a matter of days in September 2008 to come up with $700 billion to save the banks; and the Federal Reserve found many trillions more. Estimates are that tuition could be provided free to students for a mere $30 billion annually. The government has the power to find $30 billion -- or $300 billion or $3 trillion -- in the same place the Federal Reserve found it: it can simply issue the money.
Congress is empowered by the Constitution to "coin money" and "regulate the value thereof," and no limit is set on the face amount of the coins it creates. It could issue a few one-billion dollar coins, deposit them in an account, and start writing checks.
But wouldn't that be inflationary? No. The Fed's own figures show that the money supply (M3) has shrunk by $3 trillion since 2008. That sum could be added back into the economy without inflating prices. Gas and food are going up today, but the whole range of prices must be considered in order to determine whether price inflation is occurring. Housing and wages are significantly larger components of the price structure than commodities, and they remain severely depressed.
There is another way the government could find needed funds without raising taxes, slashing services, or going further into debt: Congress could re-finance the federal debt through the Federal Reserve, interest-free. Canada did this from 1939 to 1974, keeping its national debt low and sustainable while funding massive programs including seaways, roadways, pensions, and national health care. The national debt shot up only when the government switched from borrowing from its own central bank to borrowing from private lenders at interest. The rationale was that borrowing bank-created money from the government's own central bank inflated the money supply, while borrowing existing funds from private banks did not. But even the Federal Reserve acknowledges that private banks create the money they lend on their books, just as central banks do.
U.S. taxpayers now pay nearly half a trillion dollars annually to finance our federal debt. The cumulative figure comes to $8.2 trillion paid in interest just in the last 24 years. By financing the debt itself rather than paying interest to private parties, the government could divert what it would have paid in interest into tuition, jobs, infrastructure and social services, allowing us to keep the social contract while at the same time stimulating the economy.
For students, at the very least, the bankruptcy option needs to be reinstated, usury laws restored, predatory practices eliminated, and the cost of education brought back down to earth. One possibility for relieving the burden on students would be to give them interest-free loans. The government of New Zealand now offers 0% loans to New Zealand students, with repayment to be made from their income after they graduate. For the past 20 years, the Australian government has also successfully funded students by giving out what are in effect interest-free loans. The loans in the Australian Higher Education Loan Programme (or HELP) do not bear interest, but the government gets back more than it lends, because the principal is indexed to the Consumer Price Index (CPI), which goes up every year.
Predatory lenders are keeping us in debt peonage through misguided economics and bank-captured legislators. We have people who desperately want to work, to the point of going back to school to try to improve their chances; and we have mountains of work that needs to be done. The only thing keeping them apart is that artificial constraint called "money," which we have allowed to be created by banks and let out at interest when it could have been created by public institutions for public purposes, either by direct issuance or through publicly-owned banks. We just need to recognize our oppressors and throw off their yoke, and the good times can roll again.