Green Party nominee Jill Stein has been trying to make a mark on the 2016 presidential race by calling for the cancelation of all student debt. And she says the Federal Reserve could do it with a wave of its magic monetary wand.
Stein compared her plan to quantitative easing, where the Fed bought financial instruments built on housing debt off the big banks as a way of injecting more cash into the financial system: "It's simply a debt that was bought up by the U.S. government, and then essentially zeroed out, canceled," she said. "So that's exactly what we are calling for here."
This horribly mangles the mechanics of monetary policy. Critics rightly pounced on Stein.
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But the question still begs: Could the Fed buy up and then wipe out all of America's student debt?
The Federal Reserve is weird. It's basically a bank for the banks, with the power to create money out of thin air, in order to backstop our economy's financial system and prevent destructive collapses. (Like it did in 2008.) The main way it exercises those powers and obligations is by buying and selling financial instruments. Most of the time, that's U.S. government debt — i.e. U.S. Treasury bonds. But the Fed can also get creative and buy other stuff, like mortgage-backed securities. (Like it did with quantitative easing.)
Crucially, though, the Fed didn't "forgive" that debt. That's where Stein's narrative really goes off the rails: The people who owed the mortgages were still legally obligated to pay down their debts. All that changed was who owned that debt.
But people and institutions that own debt can just decide that the people who owe the debt don't need to pay anymore. John Oliver did just that, based on a model pioneered by the group Rolling Jubilee.
Could the Fed follow in Oliver's footsteps and buy up all of Americans' student debt (more than $1 trillion worth), and then forgive it?
Kinda. Sorta. Maybe.
"There's no law that says the Fed couldn't cancel debt on its own balance sheet," said Rohan Grey, a lawyer and president of the Modern Money Network. "There's no statutory law forcing the Fed to only ever run a profit, to never do anything that would lose it money."
But just because something is technically legal doesn't mean it's at all feasible. How would this work?
First, the Fed would have to get the student debt onto its balance sheet. The authorities granted by law to the Fed to buy up financial securities are pretty broad. But this is still tricky, because there are several different species of student debt. And not all of them are in a form the Fed can easily buy. There's student debt the Department of Education owns itself; there's student debt owned by private lenders but guaranteed by the government; and then there's student debt owned by private lenders and not guaranteed by the government.
Scott Fullwiler, an economics professor at University of Missouri-Kansas City, explained that the problem with the first type — the student debt owned by the Department of Education — is that it isn't available on the financial markets where the Fed conducts its monetary operations. There could be some language buried deep in the laws governing the Education Department that would allow it to unilaterally make them marketable. But in all likelihood Congress would have to write some new law making the debt marketable, or to set up some special exchange between the Education Department and the Fed.
Since the point of having the Fed do this is presumably to get around Congressional inaction, that's a big problem. On top of that, well over $800 billion of the more than $1.3 trillion in outstanding student loan debt is owned directly by the Department of Education.
But if the Fed could at least buy up the $500 billion remainder, it does seem to have the authority to unilaterally forgive the debt. "The Fed has very very wide latitude to establish its own accounting rules," Grey said. Of course, the Fed would be giving up a lot of revenue if it waved away hundreds of billions in debt. So it would remit less profit to the Treasury. But the Fed's unique money-creating powers make it impossible for the Fed to go bankrupt or insolvent.
Ultimately, though, Fullwiler and Grey concluded that the biggest difficulty here isn't so much a matter of statutory law as of political legitimacy.
The Fed has evolved dramatically over the course of its 100-year existence. And creative interpretations of its authority have already expanded its powers well beyond their original design. But all those powers, and the perceived legitimacy of the Fed to wield them, rest within its broad mandates to maintain a functioning payments system, to keep prices low and stable, and to maximize employment. No one observing the Fed — be it Congress, financial experts, or anyone else — would overlook it suddenly buying up a few hundred billion in student debt, much less unilaterally canceling it. And it would be exceedingly hard for Fed officials to explain how that targeted action dovetails with its broader mandates.
The Fed is a creation of Congress. Its political independence exists by Congress' good graces. That means the Fed's independence exists only so long as the Fed plays the role Congress says the Fed should play. The Fed knows this, which makes it a very temperamentally conservative institution.
Politicians and pundits look to the Federal Reserve to try out ideas like helicopter drops or canceling student debt because they see the Fed as willing to listen to reason in a way Congress — stricken by nihilistic and destructive ideological obsessions — isn't. More importantly, they see the Fed as a separate entity from Congress, free to act in ways Congress might not like. Which it is, but only within politically realistic limits.
Ultimately, the problem with getting the Fed to forgive student debt and getting Congress to forgive student debt is the same: Lots of people, for moral or ideological reasons, think forgiving student debt is an intrinsically illegitimate act.
Stretching the interpretation of its powers and mandate to the point of forgiving hundreds of billions or even trillions in student debt would require a Fed with radical temperament. Any movement that could browbeat it into pulling a stunt like that would have to wield an overwhelming level of political power — the power to alter the moral narrative about student debt throughout much of American society.
At which point, such a movement could probably also just push Congress to fix the problem directly.
