The Critical Detail About Student Debt No One Is Talking About
Make no mistake about it. Student debt is crippling the economy. Big purchases are getting delayed and low wages make it difficult for many graduates to meaningfully bite into the principal of their student loans.
Democrats are proposing a variety of initiatives that range from a one time payment to wiping out student debt all together while Republicans are mostly silent on the issue. My concern with wiping out the debt entirely is that there are plenty of people who applied for dozens of scholarships and took a bunch of side jobs while at college to successfully pay off their debt early. These people who successfully paid off their student debt will now have to pay off other people’s student debt as everyone’s taxes would more than likely increase to compensate for the money spent on student debt forgiveness.
Student loans are an investment, and if an investment doesn’t pan out, you don’t get your money back. If an investor puts $50K into far out of the money Tesla stock options, and they expire worthless, that investor doesn’t get their $50K back. That’s why I don’t like the idea of wiping out every cent of student debt.
A strong counterargument would be that big businesses always seem to get bailed out whether they deserve it or not. No airline executive could have predicted a pandemic, but they didn’t leave themselves prepared for a setback. Rather than build up cash, airline executives focused on stock buybacks and raising their dividends to reward shareholders (and themselves). We need the airlines for our economy, but we essentially rewarded people who decided to give themselves bigger checks rather than prepare for a rainy day. There are more blatant examples of unprepared and even corrupt companies that got bailouts when they shouldn’t have. We can go back to 2008 for plenty of examples just in Wall Street alone.
Paying off $10,000 of everyone’s student debt rather than $50,000 makes more sense. It would “only” cost $429 billion to pay off that much debt. People don’t get off entirely scotch free for making an investment and having debt, but $10,000 is life changing and momentum building for many people. Considering the trillions of dollars that went into stimulus primarily for big businesses, what’s another $429 billion at this point? That money and then some will get spent anyway on who knows what.
Unfortunately, the center of the student debt argument is about how we’re supposed to deal with people’s existing debt. Whether the Democrats wipe off $10,000 or $50,000 or some other amount, they’re more than likely to get new voters and embolden their existing base from this move. While eliminating some of the student debt would be incredibly helpful for millions of people, let’s not ignore the politics, and the lack of change at the root level.
They’re trying to please people who currently have student debt rather than consciously working to fix the system. This problem will keep happening if college tuitions are $50K per year and growing (and those costs rise if you dorm at your college too). The money the government makes from those loans is just too good to give up without a fight.
Going back to the options trading example, you don’t get your money back on lost investments, but you can’t buy and sell options without knowing the risks. You have to apply to trade options, and not everyone gets accepted. Student loans are readily available, and most people don’t understand the risks when they take out student loans. They’re just seen as a necessary resource to get through college. In reality, student loans are entire mortgages without the house, and I don’t know of any average student who can walk into a bank and land a mortgage for a $200K property with no money down and no income.
Personal finance is never taught in the school system and people are afraid that they’ll be labeled as uneducated failures by family, friends, and potential employers if they don’t have a college degree. Under these circumstances, it’s no wonder students continue to take out loans they have no way of paying in that moment. Colleges have abused these truths for decades, ramping up tuitions as the ROI looks more questionable, especially considering the availability of Google for learning new things and a variety of side hustles for making money and building up a vibrant career. College is vital for some people, but it’s certainly not for everyone. Tuition prices make it less desirable than it was a few decades ago. To date, no one has asked me about my GPA.
The current strategy and discussion revolves around putting a band-aid on a bullet wound. The issue of exorbitantly priced college tuitions is getting swept under the rug, and the main flaws of the U.S. revolve around issues we’ve swept under the rug for decades, if not centuries (this isn’t a U.S. specific problem. It applies to all countries but how the U.S. handles student debt is the main focus of this article).
This approach will allow politicians to once again play savior in another 10–20 years when we’re back at this same exact point because they didn’t fix the system the first time.
Free education won’t solve the problem either as there is no free lunch. The government paying for education will give colleges more runway to further jack up their tuition prices as the tuition is spread across everyone via taxes rather than just the students and their parents. Then, people will never escape college tuition payments that will only rise higher. Death, taxes, and college tuition…even for people who paid it off already.
An easy-to-take small step would be permanently removing the interest rates on student debt. For many people, the interest rates are the silent killer. If politicians want to meaningfully address this problem rather than just throw a bone at it, they should stop profiting from the problem they allowed to expand into what it is today.
However, there’s a bigger measure politicians can take.
If politicians wanted to make a true dent in the system, set caps on how high college tuition can go…caps that are significantly lower than today’s numbers.
Consider if tuition is capped at $25K per year. Colleges aren’t allowed to charge any higher. That way, it’s far less likely for people to complete an undergraduate and end up with 6-figures of debt. Paying off the entire debt while studying in college becomes more doable, as it’s easier to find $25K/yr jobs than $50K/yr jobs right out of the gate.
Colleges did just fine before tuitions rose up to what they are now. Some might have to scale back from the revenue loss. Considering student debt is a crippling issue for many people and will continue to be unless it’s addressed, I’m see it as a good trade-off in the long run. Out of control tuition prices that were enabled by student loans have largely contributed to the current mess.
Universities are already doing very well off the backs of their students and donors and some colleges have billions of dollars sitting in their endowments. A tuition cap would greatly help incoming students, a part of the argument no one seems to focus on right now.
While some would argue that college tuition is this expensive because of the amenities on campus and the atmosphere it provides, colleges didn’t lower their prices when learning went virtual and all of those amenities became inaccessible. Some current students have never experienced any of their college’s amenities. So this argument is a moot point.
Some colleges will point out their financial aid programs and how some students get in without paying as much. But there’s still $1.7 trillion in student debt which would be even worse if some parents didn’t pay for their children’s education.
Most people could get out of college in 2–3 years rather than four. In many college, students could take 5 classes a semester. It gets a little messy with smaller classes and credit requirements, so we’ll say someone has to take roughly 40 classes to graduate.
If you allow students to take an extra class without raising tuition, they only need 6 full semesters and some of a 7th semester (3.5 years). Eliminating some of the filler class requirements would make it even easier for most people to graduate in three years instead of four years (i.e. classes you have no interest in and are only taking because you have to take them even though they have nothing to do with your major). You can also combine certain classes together so it doesn’t feel like you’re taking the same thing twice. If people graduate sooner, they’ll pay less in tuition which will keep their personal debts down.
Most students I knew didn’t take major specific courses until their 3rd year. That’s a problem.
Also, when will we start teaching personal finance at an earlier level? Students should have a clear understanding of how they can make money, shave off expenses, invest, and how the student debt will compound and mess them up if they don’t stay on top of it. Most students who take on student debt know very little about money at that time in their lives other than the fact that when you have it you can spend it on stuff. Then, the “real world” hits.
An important question not receiving enough traction is how do we prevent this from happening again in the next 10–20 years? Student debt isn’t exactly getting better, and putting band-aids on bullet holes has led to many problems we currently face as a society and planet at large. The current cost of student tuition is the giant 800 pound gorilla in the room. How will that get addressed?