Monthly Payments will resume on $1.8 trillion of U.S. student debt beginning in October, after a 3-year payment holiday for the Covid-19 pandemic. Since President Biden had been talking of more widespread debt relief (last week nixed by the Supreme Court) this will come as a nasty shock to 27 million ex-students, some of whom have graduated since 2020 and hence have never known the burden of monthly debt payments. That may end the strange resilience the U.S. economy has shown so far this year. Come October, reality may dawn.

The economic effect of suspended debt payments is substantial. They have the same effect as embezzlement in that both debtor and creditor behave as though they both possess the money concerned. After a few months of payments suspension, the debtor does not entirely believe he is going to resume those payments and so spends the money he had been setting aside monthly for them from his income. Conversely the creditor – in this case, mostly the U.S. government – remains confident that after a finite suspension, payments will be resumed and that they will be able to charge interest on the outstanding balance. Thus, while the lengthy suspension is in place, consumption in the U.S. economy is artificially inflated.

Once payments resume the initial depressing effect on consumption is greater than it would have been without the suspension – the debt balances are greater, and debtors must make extraordinary economies to fit the new payment lump into their monthly outgoings. Then, almost immediately, defaults start occurring, at a far higher level than before the suspension, damaging lenders’ balance sheets and causing the collateral damage of all defaults. That damage will be especially severe because, by very foolish George W. Bush administration legislation in 2005, debtors cannot wipe out student debt through personal bankruptcy. Thus, the debts will continue depressing the defaulters’ consumption for years even decades after their default.

For the first few months of the suspension, its economic effects would have been small – many people’s incomes were disrupted by the Covid-19 lockdowns. However, continuing the suspension for over 3 years has caused the economy to run too “hot” in 2022-23 and will cause it to “cool” once the terrible reality of October dawns on the debtors, many of whom are sociology majors without a solid grip on financial matters. It thus explains the lack of a recession in the first half of 2023, when one was expected; we may simply have postponed the recession and probably deepened it. The games played by the Biden administration, in pretending to forgive $400 billion of student debt when they knew there was no Constitutional way of doing so without Congressional approval, may well make the autumn 2023 shock worse.

The oncoming student debt crisis may present an opportunity to examine the U.S. college system as a whole, and the financing thereof. The current system is unsustainable; student debt has rocketed to $1.8 trillion in less than two decades, and much of it is owed by people who, being unable to obtain steady gainful employment, will be unable to pay it back. Reform is thus urgently needed.

The basic problem, in the United States as in Britain, is that too many students are going to four-year colleges, with very few of them studying the STEM (science, technology, engineering and mathematics) subjects that are of practical use in a modern economy and lead to decently paid careers. The lack of STEM students is itself a result of misguided U.S. immigration policy; by admitting hundreds of thousands of Indian and other STEM graduates on H1-B visas each year, essentially as indentured servants who cannot leave their employer, the government floods the tech market with cheap labor and thereby depresses the starting salaries of U.S. STEM graduates. This causes the brightest and most capable students, who could graduate in any subject, to turn to other areas, notably law and business administration, where starting salaries for Masters’ graduates are much higher. Thus, the United States has a surplus of lawyers, most of them economically and socially damaging, and a deficit in the top quality STEM graduates that are really needed (low quality STEM graduates can be imported from India and elsewhere through H1-B, but are much less economically useful).

As well as too many students going to college, it now costs far too much. As has been well documented, the student loan system, with loans provided by the state since 2010, has encouraged the inflation of college costs, since students do not have to find the money in the short term and have a somewhat justified confidence that in the long run, their gigantic student debts will be paid off by other mostly poorer taxpayers. Some of the extra costs have been incurred through providing “country club” accommodation for students, since the loan system encourages them to regard college as a period of carefree hedonism rather than the traditional ideal of monkish seclusion to concentrate on learning.

However, the principal driver of increased costs is the appalling administrative bloat, from which the colleges benefit either directly or through imposing fashionable wokery on the student body. Harvard had a 3 to 1 ratio of administrators to instructors in 2020, spending $45,000 per student on administration, around two thirds of the fees charged. Few if any of these administrators add any value to the educational experience, many of them damage it, and they bear the prime responsibility for the increase in real college tuition over the last 40 years.

A third problem with U.S. colleges today is the appalling corruption of the admissions system. One aspect of this was shut down by the Supreme Court in its decision in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, which has outlawed “affirmative action” practices that discriminated against Asian-American students in an extraordinarily similar manner to Harvard’s discrimination against Jewish students in the 1930s.

Regrettably, Harvard’s admissions bureaucracy is seeking a way around the Supreme Court decision, that will indeed increase the discrimination against white and Asian students of middle-class but not elite families, by abolishing its previous reliance on SAT/ACT scores. These tests could be coached for to a moderate extent, but otherwise represented the best way of determining the raw ability of all but the most disadvantaged students (who lacked the cultural references implicit in them) and thereby ensuring that, as far as humanly possible, selection was indeed on merit. By relying instead on essays, Harvard admissions officers will be able to bring all their “woke” prejudices into play, without any accurate means of distinguishing between students of different ability. Thereby, the admissions process will be fatally corrupted by political prejudice and hidden racism.

In this context, we should also examine the role of “legacy” admissions, based on family Harvard attendance or large donations to the school. At Harvard, these are 70% white, exacerbating the discrimination against which the “affirmative action” supporters rail. More important, in the current state of U.S. institutions they perpetuate the ruling oligarchy. Oligarchies are fine if they are open, as was the British aristocracy of the 18th century and the U.S. of the Founding Fathers (except for the slaves), but not the French, Austrian or Russian aristocracies of that period.

However, a closed oligarchy, in which entrance is either hereditary or determined by unelected “woke” university admissions bureaucrats, is one of the most oppressive forms of government. A dictatorship would be better, because the dictator would steal only a finite amount for himself and his family. Conversely, a closed oligarchy can over time engross all the resources of a society, while dooming it to economic decline as non-oligarchs realize their position is one of mere helotry with all the most powerful, creative and lucrative opportunities closed to them.

In the last half century, led by the Ivy League colleges, the United States has moved a long way towards a closed oligarchy – I myself, from a middle-class but un-wealthy, un-“connected” background and with deeply suspect opinions even when I was 17, would be unlikely to gain admission to the Ivy League today (Cambridge is a different, less open-and-shut question). Such a society is both undemocratic and very unpleasant for those on the wrong side of the class divide. Certainly, the helots should not be expected to pick up the college costs of the elite, through forgiveness of their college loans.

However, much more deep-rooted reform is needed, taking away the power of Ivy League admissions bureaucracies, which have shown themselves unfit to be trusted, and opening both colleges and society in general to true diversity, both of racial and socio-economic background and, most important, of ideas. That requires both a reform of credentials and the abolition of credentialism. Only that way will the truly able win through, and U.S. society prosper as it should.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)