On Wednesday, June 12, Republican Congressman Jeb Hensarling (R-Texas) grilled Federal Reserve Chair Janet Yellen on whether or not she intends to conduct a student loan bailout by buying up federal student loan debt.
Testifying before the House on Wednesday, Yellen mostly sidestepped any questions that could have dug her into trouble. Yellen followed the same protocol when she answered questions for the Senate on Thursday. However, Representative Hensarling brought some life to the Wednesday testimony when he questioned the Fed Chair on her student loan policy.
Hensarling explained his understanding that the Fed can legally buy up student debt guaranteed by the federal government. He then asked Yellen if she had the same understanding.
Yellen replied by saying she was unsure if the Fed could buy up student loan debt, but she knew that her office could purchase Treasury and Agency securities.
Hensarling continued his questioning and asked, “Has the FOMC (Federal Open Market Committee) ever discussed the possibility of either purchasing student debt or municipal debt?”
“Not to the best of my knowledge,” Yellen answered.
While Yellen left much speculation about the Federal Reserve buying student debt, an ex-Fed official confirmed to The Washington Post that the Fed could legally buy up student debt, as long as it was fully guaranteed by a federal agency.
As it turns out, much of the student debt in the U.S. is in fact backed by a federal agency. According to LendEDU, the U.S. holds $1.41 trillion in student loan debt. Roughly $1 trillion of that debt is owned by the Department of Education, while approximately $300 billion is private debt that is guaranteed by the government. The remaining debt is private without government assurance.
So, Congressman Hensarling was right in his understanding that the Fed is legally able to buy up a significant amount of student debt. However, Yellen gave no inclination that her office will do that and if is unlikely considering the government is trying to lessen their deficit, not grow it.
The Texas representative, however, could be concerned that Yellen and the Fed have a plan to forgive federal student loans. If a student loan is bought by the government, the student debtor could hypothetically be off the hook.
Such an idea was actually brought up by Jill Stein, the Green Party candidate in last year’s presidential election. Stein proposed that the Fed buy up as much student debt as possible, and then simply forgive all of it.
Interestingly, many student loan borrowers in the U.S. actually believe their federal student loans will be forgiven by the government. In February, LendEDU ran a poll that asked 500 student loan borrowers the following question, “Do you believe that you will be helped by federal student loan forgiveness programs after graduation?” 49.80 percent of respondents incorrectly believed that they would be helped by such a program.
For now, it appears there is no plan for the Federal Reserve to buy up and forgive federally-backed student loan debt, but it is an interesting theory to keep an eye on in the coming years.
Author: Andrew Rombach
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