Will Obama's plan really solve student loan debt problem?

Former Reagan economic adviser weighs in


This is a rush transcript from "Your World," June 9, 2014. This copy may not be in its final form and may be updated.

NEIL CAVUTO, HOST: A student loan fix or one that is worse than the problem itself?

The president just signing an executive order capping student loan payments for millions of graduates, but former Reagan moneyman Art Laffer says this won't solve anything.

Why not, Art?

ART LAFFER, FORMER WHITE HOUSE ECONOMIC ADVISER: Well, it's balancing down, Neil, is what it's doing. I mean, this is typical of President Obama.

But it's a subsidy. It's a transfer payment. It raises taxes in general in the overall economy and will slow economic growth. What you really want to do is not lower the numerator, i.e., the amount of debt.

What you want to raise is the amount of the denominator, the amount of income. You know, to reduce the debt burden by creating jobs, output, employment, and the higher wages, that is what we all want. And that's what Obama is not willing to do.

And this problem has gotten so huge because the drop in employment is so large and a lot of these people don't have jobs who went to colleges. A lot of people who went to colleges don't expect to ever work. They got it for an education so they could appreciate life, but it's really terrible.

They have lower incomes, don't have jobs, and you have the normal group that doesn't. So, you have got a real serious debt burden problem that should be solved by economic growth, not by the silly things that Obama is doing.

CAVUTO: I wonder, too, about the cost of this being born by higher taxes on the upper income. And they are the very folks who would ostensibly hire these kids.

LAFFER: Exactly.

CAVUTO: So, they're making it more difficult for them to do so, aren't they?

LAFFER: Yes, Jack Kemp has this great phrase. I don't know if you remember it, Neil, but you can't love jobs and hate job creators. But that is exactly what seems to be going on here.


LAFFER: We need...


CAVUTO: But what is wrong -- to get the administration's point of view on this, many of them at the White House do call me.

And I was talking to the White House gardener today, who said this, that is what is wrong with letting college kids or recent graduates renegotiate into lower-rate loans, so that they are not at risk of bailing out on those loans? You say what?

LAFFER: Well, I would say that you shouldn't really do the renegotiation of the loans. That's what they signed up to when they got the education and got the money.

Those are the terms and they should do it that way. But, really, what you need to -- I mean, I really wouldn't object to the renegotiation all that much if it they would create the jobs and income they need to really...


CAVUTO: In other words, they're only doing one part of it. But they're not doing the rest of it.

And this is akin to a lot of the housing fixes. We have had to keep folks in their homes.


CAVUTO: We have only drawn out the agony, haven't we?


Well, one of the problems with the loan when you allow it to be renegotiated, but didn't start that way, now, at homes, if you have a mortgage, every homeowner has a right to renegotiate that loan. So, it's really not a 30-year fixed.

CAVUTO: Right. Right.

LAFFER: It's a 30-year fixed, unless you want to change it.

But those are the terms you go into the mortgage with, and it's priced correctly for those terms. These loans were not priced correctly for those terms. These terms were done by government.

And, by the way, on his executive order, Neil, I don't think that it even goes in to effect until December 2015. I don't -- and I think it requires congressional approval, too.

CAVUTO: You're right about that.

But it also further pushes the notion that these students, recent graduates are victims, just like those who took on more mortgage than they could hold, not that there were certainly those who might have been duped by mortgage banks and the like.

LAFFER: Yes, but they...


CAVUTO: But the vast majority did sign on the dotted line. No one held their arm and had them sign on the dotted line.

So, the victim mentality is alive and well. That's what I worry about.

LAFFER: Yes. And most of these are government loans. So if they're victims, who victimized them?


LAFFER: Well, you know who it is.

CAVUTO: Well, you're right about that.


CAVUTO: So, now we have this fix that is via executive order that many say can't hold up in court and it's a fix that still more than a year off to implement.


CAVUTO: So, to what end?

LAFFER: It's just political.

CAVUTO: Obviously, these type of issues poll well when they do these focus groups.

Does it resonate that only Democrats are the ones who care about students, and Republicans do not? What do you think?

LAFFER: I don't think so.

I mean, when you look at what is going on now politically, I think if anything, it's meant to detract attention from the VA, from that section you had before, which was really excellent, on the Veterans Administration, I mean, trying to get anyone to no longer look at the real problems. And these real problems at the VA are huge.


LAFFER: The VA literally is Obamacare writ small.

Whenever you give away valuable resources, you are going to go bankrupt unless you figure out a way of rationing the gifts. And that's what the VA does. It's never given them appointments. It's keeping them waiting for six or eight months.

I remember the gas lines when they had long lines to get 10 gallons of gas. It's ridiculous. It's just government out of control.

CAVUTO: Amazing. I don't remember those gas lines. You're so much older than I am. But...

LAFFER: Oh, I am.


LAFFER: But wiser and more mature as well.

CAVUTO: Indeed, you are, sir. Indeed, you are.

LAFFER: No, I'm not.


CAVUTO: Art Laffer, thank you very much. Always good seeing you.

LAFFER: Thank you, Neil.

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