Disrupting Student Debt By NY Assemblyman Ron Kim Version 2.0 www.GutCheck.us

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EXECUTIVE SUMMARY………………………………………… 3

INTRODUCTION ………………………………………………… 5

STUDENT & EDUCATION DEBT BACKGROUND…………… 7

RESILIENCE VERSUS PSEUDO-STIMULUS ……..…………. 10

SOLUTIONS ……………………………………………………… 12

CHALLENGES AND NEXT STEPS ……………………………. 13

CONCLUSION …………………………………………………… 17

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EXECUTIVE SUMMARY

The elimination and cancellation of student debt is the ultimate litmus test for whether one is aligned with people or with corporate politics and so-called too-big-to-fail banks. Most elected officials and policymakers with progressive stances support worthy and vital causes such as immigration reform, women’s rights, and criminal justice reform. That is to be welcomed, but it must also be borne in mind that the problems that these causes address are symptoms of a deeper and more pervasive problem, one relating to the way our private sector and economy function. Unless we double down on the public provision of public goods and invest in local economies, we will continue always to be a step behind, only reacting to the failures of divisive politics rather than proactively preempting those failures. We are now facing the upshot of decades of self-imposed austerity and corporate welfare. Politicians have favored corporate interests and starved their communities of public resources, thereby undermining local economies. A moment of honesty and truth should have taken place after the 2008 financial meltdown. Simply put, our federal government had a choice: Bail out the banks or the people. They chose the banks, the same culprits who crashed the system. Now, as the next global economic meltdown looms, policymakers will face another decision: Work together to make sure that our communities are able to live, sustainably — or continue to produce policies and make decisions that withhold resources from our communities and our people. As a public representative, I propose we begin to address these problems by canceling $1.6 trillion dollars of student debt in this nation. It is the nation’s second largest category of household debt and growing every year. As studies show, sizable public indebtedness is one of the clearest signs of an unsustainable society and an economy that will crash. The system has failed almost as if by design; our current higher education market failures are a direct result of four decades of underinvestment by the federal government, and two decades of excess funding for interest-bearing loan programs. This failure is tragic and unnecessary. Financial mechanisms exist for the central bank, the US Department of Education, state governments, and local municipalities to buy and then

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cancel, write-down, or monetize current student debt in ways that benefit student debtors and their communities. This paper will mainly focus on state and local solutions that not only write-down troubled student debt but also seek creative monetary solutions to keep resources in local economies.

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INTRODUCTION

Nearly $1.6 trillion dollars of student debt is owed by 44 million borrowers in America. Millions of people across the country are stuck in a lifetime of debt, defaulting on billions of dollars to the government and banks. More than 80% of Americans are living paycheck to paycheck and just one car accident, doctor’s visit, or family crisis away from unrecoverable financial turmoil, bankruptcy, and poverty. Instead of helping people get out of a debt-driven society, Congress has strengthened rules favoring the lending industry with tougher restrictions on bankruptcy discharge. There have been recent federal efforts to avoid another financial meltdown, but the mechanisms that led to our nation’s debt-driven student financing issue are systemic and deep-rooted. As long as Congress attempts to resolve this problem by tinkering with the pre-existing rules and logic of privatized education, we will be limited to band-aid solutions that provide temporary and short-term relief but we won’t get to the root of the issue.

When it comes to the growth of student debt, most progressive politicians campaign on providing free and affordable college options. Few focus on alleviating the current debt incurred by borrowers. However, there are some notable exceptions. For those already indebted with education loans, there have been efforts to forgive them for those entering public service, and to lower the interest rate on loans. In addition, the Levy Institute has put together a comprehensive and rational proposal for the federal government to forgive federal student loans, and Bernie Sanders has introduced legislation to make higher education free, thereby boosting the middle class and stimulating the economy in the process. These are laudable efforts and initiatives that should be pushed. However, while federal student debt forgiveness and free tuition proposals are critical components of comprehensive higher education reform, they cannot be mirrored at the state level due to the budgetary limits of state governments who are users of the national currency, in contrast to the monetarily sovereign federal government that issues the currency.

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Furthermore, policies that merely subsidize the cost of higher education for students do not, on their own, address the underlying speculative and profit-seeking dynamics that cause tuition to rise in the first place. Doing so requires transforming not only educational financing mechanisms, but the very systems of educational credentialing and learning themselves. Thus, this white paper offers a state-by-state debt-forgiveness solution for the millions of borrowers who are suffering, and also suggests ways that local governments can transform student debt into a re-investment opportunity to build resilient local economies. In particular, it proposes to combine existing debt forgiveness with the monetization of future student loans via complementary currency and digital financial technologies. Such alternative financing structures have the potential to transform extractive and profit-driven education models with new systems of cooperative learning, and in the process reduce our dependence on private banks and capital markets that presently generate the majority of new investment in the education sector.

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STUDENT & EDUCATION DEBT BACKGROUND

This white paper is based on three basic premises. First, higher education, as currently organized, undermines democracy and reinforces inequality. Second, everyone should be able to access a quality education without going into debt. Third, higher and education should promote democracy while encouraging students to think critically about the world and their place in it.

Education cannot promote equality or democracy as long as most people must take on debt to enroll. That is why we need to cancel student debt: a clean slate is necessary in order to begin to rebuild our educational system.

Before describing how we might do this in New York State, it is important to provide some background. As a recent St. Louis Fed report indicates, the rise of student debt in the US - tens of millions of borrowers now owe $1.6 trillion in loans - has been caused by decades of state and federal funding cuts, accompanied by loan programs that steer students to for-profit institutions of questionable merit now in addition to more established universities: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2837929.

Let’s remember that public college in the US was tuition free or low cost for most of the 20th century. The City University of New York was virtually free from its founding in the 1847 until the 1970s. It was only after masses of people, especially women and people of color, began demanding access to higher education during the civil rights era that tuition became a fact of life.

This state of affairs is morally reprehensible and harmful to all of us. We would all benefit from a fully funded education system, one that leads to an educated citizenry and where professional researchers can produce work independent of the market and of partisan politics. Instead, in our increasingly unequal, winner-take-all economy, millions are drowning in debt or struggling in default. The problem is no less serious in our state. Comptroller Tom DiNapoli has shed significant light on the out-of-control status of student and education debt: • New York’s student loan debt has more than doubled in the last decade, growing 112

percent from $39 billion to $82 billion. • The number of student loan borrowers in the state has risen sharply over the past ten

years—by more than 41 percent—to 2.8 million.

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• Student loans represented 11.4 percent of the $722 billion owed by New Yorkers in outstanding consumer (or household) debt. Figures on student loans do not include other debts that families and individuals incur to pay for college, such as home equity loans, borrowing from retirement accounts, or credit card debt.

In New York City alone, more than one million people (roughly 15%) have student debt, collectively owing around $35 billion. Student loan-linked financial distress is noticeably high in the poorest New York City neighborhoods. Moreover, lower-income areas have disproportionately high delinquency and default rates.

This is why New York State should reject a system that sells education as an individual “investment.” Instead, our state should lead the nation by ensuring that all New Yorkers are educated, regardless of their ability to pay. While we seek to transform the political economy of higher education in general, we can work at the state level to cancel student debt, freeing people from a generational burden that should never have been put on their shoulders in the first place. This crisis of exorbitantly high and still growing student debt was created by the federal government underinvesting in higher education for forty years while overfunding interest-bearing loans, putting the burden of financing colleges and graduates schools on the individual. Meanwhile, both private and public colleges began to raise their tuitions, taking full advantage of essentially unlimited access to money. What’s even more troubling is that nearly 20 states use punitive measures to help private collection agencies and lenders collect their student debt: https://www.nytimes.com/2017/11/18/business/student-loans-licenses.html These states will punish delinquent debtors by revoking their driver’s licenses and even professional licenses unless they pay back what they owe. As for the federal government’s efforts to forgive borrowers based on their public service, out of 1.2 million borrowers who applied, only 55 had their debts forgiven: https://www.washingtonpost.com/education/2018/09/26/few-graduates-working-public-service-have-received-expected-break-loans/?noredirect=on&utm_term=.8eea06b4e34e Currently, there are pending federal lawsuits against private lenders like Navient and a growing legal push across states to crack down on predatory lending practices.

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However, with the current Department of Education, there is a clear preference toward favoring creditors and lenders over the needs of struggling borrowers. In 2018, United States Senators and Congress Members introduced various federal bills to address borrowers’ inability to have their student debt cancelled even in cases of financial distress—including bankruptcy. Congressman Jared Polis from Colorado also introduced the Students Over Special Interests Act (H.R. 5928), which would repeal President Donald Trump’s trillion dollar corporate tax breaks and repurpose that money to cancel the nation’s student debt. This October, more than 20 labor groups, nonprofits and community leaders joined elected officials calling for a one-time cancellation of student debt, outlining the economic rationale and financial mechanisms for how it could be executed: http://spectrumlocalnews.com/nys/capital-region/capital-tonight-interviews/2018/10/10/canceling-student-loan-debt Long before elected officials began paying attention to student debt and the problems surrounding a debt-driven society, advocates and community activists stepped forward to help those suffering from debt-induced financial woes. Laura Hanna and Ann Larson, co-founders of the Debt Collective, are leaders of an organization that spent years buying and canceling debt for hundreds of low-income families and launched the first student debt strike securing $600 million dollars in debt relief for low-income people across the country. This visionary organization is building a 21st century debtors’ union to continue to challenge austerity politics and predatory actors: https://debtcollective.org/.

At the same time on a global scale, a larger movement has developed and begun to challenge austerity politics through innovative public financing approaches. Some have called for all central banks to institute a “People’s Quantitative Easing” or “Green Quantitative Easing”, anticipating the inevitability of another economic breakdown. The goal would be to ensure that our public money is not used to bail out commercial banks but instead directed to settle debt and invest in a green economy. For the first time, there is a growing coalition of policymakers, academics, and organizers willing to have open and honest conversations about money and debt, and to go beyond the legislative edges to address the core problems fueling an economy of scarcity and private extraction.

As public servants we need to represent the interests of our communities and community organizations over lobbyists and corporate interests.

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RESILIENCE VERSUS PSEUDO-STIMULUS

After the 2008 financial crash, caused by private banks and lenders engaged in subprime mortgage lending and over-leveraging of bad loans, the federal government bailed out the Too Big to Fail Banks in America with trillions in stimulus money.

Further abroad, massive housing and infrastructure spending by China kept global markets relatively stable as we witnessed millions of low-income Americans lose their homes. Between the G-7 Central Banks and the leading financial institutions around the world, the stimulus funds were spent to maintain GDP growth and a uniform, unsaid motto was adopted: Keep the Party Going at All Costs.

At the same time, economists, the media, and politicians remained committed to a growth model driven by banks and other financial institutions who created new purchasing power out of thin air in the pursuit of privatized profits.

When the economy is booming, some states and local governments, at the behest of corporate interests, continue to extract wealth from local communities into the pockets of wealthy corporate elites through economic development funds, corporate welfare, incentives, subsidies, or tax breaks.

The ultimate irony, and the reason for the rise of groups like Occupy Wall Street, Debt Collective, and Black Lives Matter, is that this economic model extracts wealth from the public and burdens countless people with a lifetime of debt; then when everything crashes, the perpetrators expect the public to hand over trillions more in stimulus money to bail them out.

They are extracting from both the front and the back, or the boom and the bust of the economic cycles. Alternatively, an economy based on community resiliency is built to develop, retain, and circulate as much money and economic value in local communities as possible. Instead of a triangular hierarchy where the top 1% keeps getting wealthier and more powerful, a circular model pushes for lateral growth based on peer-to-peer and cooperative production.

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A private debt-driven higher education market puts 80% of Americans, who are already living paycheck to paycheck, in a state of constant stress, worrying that they can’t pay their bills and may lose their homes or families.

Many among the ruling elite have decided that this fear is the ultimate motivation for our society to be as productive as possible. Political leaders like myself believe people are naturally curious and intrinsically driven, we believe that people (if given the opportunity) are motivated by deep purpose and are innately cooperative and collaborative. Another way to describe the difference is to ask whether our leaders believe the public is driven by pure self-interest, where greed and materialism dominate our everyday rationale, or if they think people are fundamentally cooperative and collaborative human beings. Those of us with vision fall in the latter camp.

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SOLUTIONS

The most logical solution of the manufactured student debt crisis, as outlined by the Levy Economics Institute’s “Macroeconomic Effect of Student Debt Cancellation”, is for the federal government to execute a one time student debt cancellation. It outlines several mechanisms for doing so. But there are also distinct state and local measures that can be taken until federal instrumentalities are willing to act. Since the 2008 financial crash, Professor Robert Hockett of Cornell University has focused on using local eminent domain powers to buy and cancel underwater mortgages all around the country: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2173358. In the face of numerous challenges, including lawsuits by Wells Fargo, Deutsche Bank, and other major financial institutions, he persisted and made it clear that local governments have the ability to buy troubled debt to improve public conditions. Implementing this across the country on a state-by-state basis would be a multi-step but feasible process: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2532704. To begin with, every state may have different versions of eminent domain procedures, and may first need legislative amendments to make it clear that “debt” qualifies as “property” and can be purchased to serve a public good. Secondly, a local agency or even a public bank should be created through state legislation to oversee the cancellation of student debt. Once there is a structure to buy and cancel student debt at the local levels, policymakers will be able to design various financing mechanisms based off that structure that incorporate innovative monetary techniques and cutting-edge digital financial technologies.

For example: In addition to debt cancellation, we can protect local economies and communities via the issuance of complementary currencies. Complementary currencies can be designed to reward consumers for shopping at independent and family owned local stores, or award “civic points” for volunteering or community service. Another option is to design a student debt forgiveness program financed by a complementary currency, which can be used to pay for local educational and care-based services such as mentoring a child, helping seniors, volunteering at a shelter, etc. Without such radical programming and novel financing structures, a one-time debt forgiveness may be insufficient to prevent mega corporations and Too Big to Fail Banks from driving students back into debt and extracting more money from local communities.

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CHALLENGES AND NEXT STEPS

There will be a coalition of special interest groups, corporations, and powerful individuals who will oppose and lobby against the measures proposed here. There will also be financial hurdles to address. Once we address them, however, the return on (re-)investment in our people – the “people’s ROI,” so to speak, will more than justify the changes we make. Legislative Hurdles For four decades, most states have adopted a pro-market culture where state agencies help the private sector perform as efficiently as possible. We allowed new monopolies and chain stores to dominate markets and destroy mom and pops and independently-owned businesses. Big companies with big agendas have endless corporate money behind their lobbying efforts, and it will be difficult to overcome their ability to control the macro agenda by “killing” any new legislation that may disrupt their ongoing extraction and destruction via monopoly. The two immediate legislative challenges will be to: 1) Institute financial mechanisms at the local and state levels by activating eminent domain, or compulsory purchasing, to purchase debt; and 2) Create a regulatory environment conducive to the growth and flourishing of new decentralized complementary currency and locally-oriented digital financial technology systems. In New York State, there are currently five legislative proposals that would lay the groundwork to cancel student debt, co-design local digital currencies, and circulate real value back into communities:

• Community Currencies • The Office of Financial Resiliency • New York Fintech Sandbox Act • New Yorkers Financial Freedom Act • NYS Community Bank Act (pending)

These and many other statewide initiatives around the country are designed to turn our nation, from the ground up, into a green society in which we can live in what some refer to

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as a “Liquid Democracy”: a fully engaged and participatory polity where people truly have ownership of outcomes. In this paradigm shift, local government and states can also accept community and cooperative digital currencies for local taxes, bills, fines, etc. to provide functional local monetary ecosystems. Other nations, like the Netherlands, are already ahead of us in realizing this vision. It has spent the last few years building an ecosystem around local and community-based digital currencies under a private-public initiative led by Qoin.com.

While the full vision of a society, economy, and polity redesigned along such lines is beyond the scope of this white paper, what is proposed here is fully in keeping with it. So will be other initiatives I’ll be proposing in the near future.

Financial Hurdles

Even if we can pass legislation and activate local eminent domain to buy and cancel student debt, how will we fund and finance it?

One immediate possibility at the state level is to eliminate “corporate welfare” and use that money to buy distressed student debt.

The State of New York issued a total of $8.25 billion to corporations in 2015 and offered incentives totaling 76% of the state’s gross tax revenue, ranking it the worst in the nation in this category for effective return on value. During that same year, New York’s distressed student debt was around $9.8 billion, approximately 12% of the state’s $82 billion in total student debt.

If we phased out corporate giveaways in five years to give the private sector enough time to readjust, that corporate welfare money can instead be used to cover 84% of our state’s total distressed student debt.

Return on Investments (ROI) for Student Debt Cancellation versus Corporate Welfare

When defending corporate welfare, politicians often cite job creation as the main reason for giving away billions to super-monopolies and mega-corporations.

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However, Timothy Bartik, from the W.E. Upjohn Institute for Employment Research, has shown in a recent study that there is no statistical correlation between corporate debt relief and effective economic growth:

“The majority of studies [published to date] suggest incentives are not cost-effective, with either no statistically significant effects or large costs per job created. The high costs of economic development programs lead to concerns that many of these incentives are ineffective or have negative effects, such as distorting business investment decisions or unduly enriching companies that would have made investments without the need of incentives. Bartik’s initial findings add to the growing body of evidence that there is little proof that incentives achieve their goals: he found no correlation between the use of incentives and changes in wages, unemployment rates, or economic growth in the places he studied.”

By contrast, a 2017 study done by the Levy Economics Institute of Bard College shows that canceling student debt correlates to an impactful increase in real GDP:

“A program to cancel student debt executed in 2017 results in an increase in real GDP, a decrease in the average unemployment rate, and little to no inflationary pressure over the 10-year horizon of our simulations, while interest rates increase only modestly. Our results show that the positive feedback effects of student debt cancellation could add on average between $86 billion and $108 billion per year to the economy. Associated with this new economic activity, job creation rises, and the unemployment rate declines.”

These economists and studies indicate that in conventional ROI measurements, cancelling student debt instead of corporate expenditures lead to much higher macroeconomic returns. And this should not be surprising, for people whose wealth and incomes are well below the top of the income and wealth distribution - like young people recently out of college - add much more consumption demand to the economy than do already-wealthy people and firms at the top of the distribution, who have long since reached peak consumption.

However, to capture ROI fully, there must also be a standard measurement on local economic impact.

A simple method would be to make an extraction-circulation ratio. Does the debt relief result in extraction of revenue and resources from regional economies, or circulate additional money and value to local levels?

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For example, when analyzing New York’s corporate incentive package offered to Amazon, which totals over $3 billion in future tax breaks, what would be the local economic impact measured by how much Amazon is extracting out of New York versus circulating? Alternatively, what would be the local economic impact if we repurposed that money to buy and cancel all of the distressed student debt in New York City?

If Amazon is able to monetize the $3 billion incentive to a third party investor who’s willing to pay hard cash to Jeff Bezos upfront (perhaps $1 billion), one could make the argument that a trillion dollar mega-corporation could capitalize on that money more so than 350,000 debt-free New Yorkers.

But due to the lack of openness and transparency of what many refer to as “sweetheart deals”, it’s unclear exactly how taxpayers money is used, leveraged, or monetized, and therefore difficult to assess the overall financial impact.

Regardless, it is more than clear that after years of these corporate giveaways, public indebtedness has worsened, meaning the returns on the taxpayers investment does not reach the people.

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CONCLUSION

This is a gut check moment for every politician and policymaker. Will we as public representatives fight for our communities or will we continue to give wealthy elites more money while starving our communities of public resources? The rise of hate crimes and the vilification of black and brown communities, low-income communities, immigrants, and women suggests we may actually be heading towards terminal social and political breakdown, where there is a glaring concentration of power wealth, extreme divisiveness, and corruption. The intent behind this document is not to undermine politicians or merely underscore the importance of taking strong positions against acts of hatred and divisiveness. With every incident involving hate or violence, elected officials and community leaders must fight back proactively and in unity. But as Daniel Pinchbeck noted in “How Soon is Now?” when referring to the #MeToo movement, “Probably we can’t completely heal the divisions between men and women until we address the unjust, oppressive nature of our economic system as a whole. Capitalism turns human beings into commodities and conscripts them into a false set of values. Both men and women chafe against the constraints of an unnatural system.” Pinchbeck’s assessment rings true for all divisions in our society, not just between men and women or in-group and out-group more generally. The goal then must be to respond back against hatred, and divisiveness while working towards a just and sustainable, truly green economy and society.

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Thank you for reading our White Paper

Written by Ron Kim, Member of New York State Assembly Edited by Tony Cao, Chief of Staff to Ron Kim Designed by Digital UrbanaContact info@ronkim.com Edited and Supported by:

Laura Hanna is a co-founder of the Debt Collective and the Rolling Jubilee fund. As board President of the RJ fund she has facilitated $33 million dollars of debt relief to people struggling with medical debt, payday loans, probation debt and student loans. She has a background in film, art and media. Prior to political organizing, she worked to develop film and media strategies on behalf of those facing the death penalty.

contact: laura@debtcollective.org

Robert Hockett is the Edward Cornell Professor of Law at Cornell University, Senior Counsel at Westwood Capital, and Founding Board Member of the Digital Fiat Currency Institute. He has previously worked for the New York Fed and the IMF, and is Co-Founder of the Occupy Money Cooperative. He researches, writes, co-organizes and assists legislators and regulators in providing the prerequisites to a just economic order.

contact: rch37@cornell.edu

Ann Larson is a co-founder of the Debt Collective and the Rolling Jubilee fund. She holds a PhD from the CUNY Graduate Center where she conducted research on first-generation college students. She has published numerous articles on class, education and debt.

contact: ann@debtcollective.org

Rohan Grey is the President of the Modern Money Network, Research Director of the Digital Fiat Currency Institute, and a Doctoral Fellow at Cornell Law School.

contact: rlg265@cornell.edu

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