AIG, the world's largest insurance company of which we–US taxpayers–now own 80%, has consumed nearly $170 billion in our dollars to bail out bad bets it made selling credit insurance to banks and investment houses. This weekend, we learned where the money went–largely to other Wall Street banks and investment houses: $12.9 billion to Goldman and Sachs, $2.3 billion to Citibank, and remarkably nearly $12 billion to Deutsche Bank of Germany, the same to SociÅ½tÅ½ GÅ½nÅ½rale of France, $8.5 billion to Barclays Bank of England, $5 billion to UBS of Switzerland (now under investigation for running a tax avoidance scheme for the very wealthy). To add insult to this injury, the very bankers who caused the catastrophe are paying themselves "retention bonuses" totaling over $165 million dollars in order to avoid "losing talent." Apparently, it takes a lot of talent to lose hundreds of billions.
This raises a simple question. Instead of using our money to bail out the folks that got us into this mess, why don't we help the generation that we'll rely on to dig our way out of the hole? Instead of shipping billions to bankers in Germany and France, why not relieve the debt that burdens more and more of our own children as they struggle to pay for college?
The burdens are clear. College tuitions have been rising faster than inflation–they're up about 58% since 2000. Grants haven't kept up. As a result, students are taking on more and more debt. These days, two of every three students graduates with debt, and that debt averages more than $21,000. But the average is misleading. For the children of middle and low income families, the debts are much higher. Indeed, increasing numbers of children–the Department of Education estimates as many as 400,000 a year–forgo college or drop out to avoid taking on the debts it would cost.
President Obama has recognized this problem. In his "stimulus" plan, he dedicated an additional $15 billion for Pell grants, raising the maximum size of the grant and the number of scholarships. In his budget, he calls for indexing those grants–which go to the neediest students–to inflation. He also calls for moving to direct lending, saving some $4 billion a year from subsidies to the banks, and using that to pay for the changes.
But as the president knows, the increase comes nowhere close to moving Pell grants to covering 70% of the costs of college, which they once did in the 1960s. Student loans and debt will continue to rise.
Why not forgive student debt as part of the stimulus? Or at least give students the same rates that the banks are getting–which is virtually zero. The Federal Reserve is, as Ben Bernanke said on Sunday, essentially "printing money" to provide banks with easy credit in an effort to help them write down their bad debts and begin to make loans again. Trillions–that's with a "t"–have been dedicated in loan guarantees, short term financing, swaps and the like to bolster the banks.
So why not do the same for students? Lower their interest rates to the level now offered the banks. That would dramatically reduce the burden on graduates, enable them to afford a car or to rent an apartment. It would more surely stimulate the economy than shipping more money to banks that send it across the globe to pay off bad debts.
The argument for bailing out the banks is that the economy won't return to prosperity without getting the financial system working again. The major banks are said to be "too big to fail," and so the US is devoting trillions to keeping them afloat.
But why doesn't the same argument apply to the next generation? The long term health of the economy depends on the next generation getting the best education it can. That generation is "too big to fail" if this country is to retain a broad middle class. Weighing them down with unmanageable debts, forcing many to forgo the education that they have earned, is economically ruinous.
At $85 billion a year, student loans are big business. And the banks have enjoyed a true scam. They make the profits; the government guarantees the loans–and allows the companies to charge exorbitant fees, waives bankruptcy protections, and other consumer protections. Too many students find their loans close more doors than they open. As we struggle to find a way out of this mess, why not bail out the college kids rather than the culprits.