The election of Donald Trump surprised a vast majority of pollsters and pundits, with many predicting that Trump had a mere 15% chance of winning prior to the election. Many were shocked at Trump’s success due to the huge swaths of people he had alienated with his numerous contentious statements. However, Trump’s success is particularly shocking not just because of his crude and bigoted language but also because many of the policies he has championed do not align tightly with those fundamental to the Republican party. Specifically, Trump’s promised $1 trillion Infrastructure package, allocated over a ten year span, contradicts a core tenet of the Republican platform: shrinking the size of the government and reducing its financial deficit.
Considering Trump’s promise to implement wide-ranging tax cuts, as well as the Federal Reserve’s likelihood to raise interest rates, financial analysts and economic forecasters predict that Trump will bring about significant inflation of the U.S. Dollar. Over the past three years, the U.S. Dollar has faced inflation of about 0.75%, well below the 2% target sought by the Federal Reserve. Thus, from an economic perspective, many are not concerned with the potential increase in inflation of the greenback brought by Trump’s policies.
However, a factor that many of those analysts have not raised in the public discourse is the effect that inflation has on creditors and borrowers. In most economic models, inflation helps borrowers because the value of the interest they owe is less than the value they agreed to pay. For example, if John agrees to pay Luke 10% on a 100 dollar loan, John owes Luke 10 dollars in interest. If the value of the dollar goes up 50%, however, then those 10 dollars are really worth 15 dollars, but John still owes Luke only 10 dollars due to the agreement they forged prior to inflation.
However, recent wage stagnation in the U.S. economy undermines the foundational assumptions of this model, which depends on wages rising with inflation. When wages do not rise with inflation, interest on new loans becomes more expensive, because the same $10 dollars from the previous example now effectively costs $15 (assuming the same 50% inflation rate). Thus, anyone seeking new loans is worse off.
Now, why is this all relevant?
Student debt in the United States exceeds $1.2 Trillion dollars, more than the sum of U.S. credit card debt and outstanding automobile loans combined. Despite the rising costs of education, demand for it is so inelastic that students continue to enroll and apply to universities at record paces, indicating that they are not sensitive to tuition increases.
As enrollment rates increase, students have a growing demand for loans to finance their tuition costs. Many of these loan recipients come from low-income households without the means to pay off the loans in the short term. Most students who accept these loans anticipate that their salaries after graduation will be sufficient to defray the costs of the loans in a reasonable time frame; in short, they believe that the massive debts are worth it in the long term. However, recent college graduates are more underemployed than the rest of the American workforce, indicating post-college incomes lower than college students projected when calculating the value of loans they could afford before beginning their education.
As a result, a growing macroeconomic problem is emerging wherein recent college graduates cannot afford to pay back the exorbitant loans to which they are beholden. The value of these loans is so great — again, they are valued at 1.2 trillion dollars — that a macroeconomic “bubble” is forming in which many American college graduates may default in the future.
This issue is exacerbated by the forthcoming inflation expected from the aforementioned policies planned by Donald Trump. While the many other issues associated with Trump have rightfully attracted the majority of media attention, the role that “Trumpflation” could have in accelerating a burst of the student debt bubble — and fomenting a national financial crisis — is significant.
Fortunately, Jewish students are at relatively low risk of direct harm from the student debt bubble. Jewish-Americans are the second highest educated minority group in the United States behind Hindu-Americans.
No data exists detailing the levels at which Jewish students participate in financial aid programs at universities. Even less information is available on the frequency with which they solicit student loans to pay tuition costs. Still, Jewish families in the United States earn enough on average to make Jewish-Americans a fixture of the U.S. middle class, according to the Pew Research Center. As such, circumstantial evidence suggests that despite high enrollment figures in the Jewish-American population, the average Jewish student does not rely on as much financial aid as the average non-Jewish student.
This is not to say, though, that Jews ought to not be concerned. On the contrary, we would suffer as much from a financial crisis as everyone else. Given Donald Trump’s flare for the unpredictable, let this be another reason for the American public to insist on treading forward with optimism for the future; however, let us do so from a critical distance that engenders vigilance and civic engagement among us all.
