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Here's how Bernie Sanders' plan to "cancel" student debt will crash the stock market

Updated: Aug 20, 2019

Disclaimer: I currently have $22,000 left in student loan debt.

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Bernie Sanders is at it again, again.

Today's latest plan is to "cancel" $1.6 trillion of student loan debt. How does he plan to pay for this debt cancellation? With a tax on Wall Street speculation.

Using the millennial's hatred for wall street is an amazing tactic for Bernie. If there's one thing he's good at, it's salesmanship. This is a clear move to buy votes in the primary election. Sanders' has already been running close in the polls to Joe Biden, and he's been looking for something to push him over the top. Why not just literally buy the votes of thousands of people who are still paying off their student loan debt?

I've gone pretty far into how bad this plan would be for our economy in another article. You can go into the numbers details in that article here. Just as a quick reference, a .5% tax on stock trades could reduce your potential retirement by 39%. "Aggressive/risky" trading is what funds use to balance their portfolios against their safe investments. A tax on aggressive trading will lower the amount of risky trades companies are willing to take, lowering the average gain on your account every year.

Just the fear of this plan could cause a stock market crash. Maybe you don't care about that, but remember, there's a big chance either you or someone in your family has money in the market in some way. A large portion of the stock market is made up of IRA's, 401k's, Pensions, and other private retirement accounts.

What is Wall Street speculation?

Since I grew up on a farm, I'll use it from a farmers standpoint. While growing up I remember hearing my dad mention grain "contracts." I never quite understood what that meant until I read "Basic Economics" by Thomas Sowell for the fifth or sixth time.

The grain market can fluctuate greatly. As a farmer, your job is hard enough. Managing hundreds or even thousands of acres of carefully placed plants takes a lot of skill.

Speculation helps alleviate one of the burdens of farming- the market price for your product.

Here's a simple version of speculation. Let's say the current price for corn is $5 per bushel. A farmer knows that when it comes time to sell, the price could be $5, $6, or it could go down to $4 per bushel.

An evil "wall street speculator" calls the farmer and says, "I'll buy 50,000 bushels of corn from you at $4.90 per bushel." This might not be the best price the farmer could get if they waited until harvest, but it could be an amazing price if Trump tweets about tariffs again before it's time to sell.

The farmer is getting value out of this contract. Peace of mind, and a guaranteed income.

The speculator is looking for value, too. If the speculator offers $4.90 per bushel, it's because they think they can sell the grain for more than that amount later. The speculator is taking a piece of the market, but they are offering something of value in the process. They might not make any money, or they might make a huge profit. One thing is for sure though- both parties benefit.

What we tax, we get less of. That has always been the case. Maybe the example with the farmer is simple, but the principle remains the same for any product of industry involved in investment and "speculation."

So what about the student loans?

Student loans are a problem, but writing them off without a plan to change the entire structure of the college economy will damage that market as well. The biggest issue we have in college's is the fact that many students are getting degrees in things that are not a value to our society. No one needs another person that has a "Political Science" degree. The fact that you were willing to pay $100k for a nearly worthless degree is one of two major reasons college is so expensive.

The other is the fact that the government has been subsiding the loans for decades. In a free market, you would be less likely to get a degree in a worthless field of study if you were not able to get a taxpayer subsidized loan for that field. The government has been keeping the interest cost of college artificially low for so long, that it's become standard that you go get your "college experience" for hundreds of thousands of dollars. In reality, a bank would not loan you money to go into a field that is not likely to ever produce a career. If they were to loan you the money, it would be at a high enough interest rate that you'd at least have to think about it first.

Any time the government subsidizes a market, the products in the market get more expensive. There is less incentive for efficiency. There's less incentive to cut waste, fraud, and abuse. This leads to the prices gradually moving higher and higher for that product. You can imagine what the price of a new car would be if the government was giving out 0% interest loans to anyone that wanted one. What would be the incentive for a new car to be produced efficiently?

Too many occupations require college degrees

You'll see a "degree required" field when filling out any job application for most careers. In all actuality, this has just become a way to filter applicants. Finishing college means that you at least have the dedication to see something through. Rarely have you actually learned the day-to-day skills that you'll be utilizing in this career. We need a shift towards LESS people going to college, and more people going to trade schools, or taking internships. Maybe you'll even get a paid internship! Wouldn't it be better to let someone pay you hourly to learn a skill rather than paying hundreds of thousands of dollars to maybe learn a skill?

Another note on people taking out student loans

It's completely ridiculous to think that as a 16, 17, or 18 year old- You somehow know what you're going to want to do for the rest of your life.

So what about all the money I've already paid in student loans?

This is where we get to a fairness issue. I've paid tens of thousands of dollars towards student loans over the last 10 years. Many people have actually paid off their student loans. Where is the fairness for those people that worked hard enough to pay off their loans? Shouldn't they receive some sort of repayment from the government? How is it fair that now, in 2019, all current loans be forgiven? Are you telling me that in 2018 human beings didn't have a right to free college?

Where are my "college repayment reparations?"

This brings in the fact that even the idea of student loan forgiveness has caused people to stop paying their student loans. The idea that student loans be forgiven is so popular that people are planning on it being done. This can actually add to the problem, causing it to be a bigger issue that "needs to be solved."

At the end of the day-

This is just another promise from a struggling political campaign to buy your vote. It's enticing. I mean that. Having student loan debt myself, I know just how enticing it can be. The problem is that this tax, like all other taxes, will be paid for by you- not the person the tax is on. Even if this doesn't crash the stock market, the end of day result is that that $1.6 trillion is YOUR MONEY.

It's not a tax on stock earnings, it's a tax on being in the market, period. It will come out of your pocket via increased fees, or decreased earnings, one way or another.