Student loans are not like other loans.
Imagine you are a retailer of women's clothes and you want to finance your winter inventory. You have been in business for a while and you know what to buy and how much of it. You prepare financial statements that accurately represent your current financial condition and that predict, reasonably well, what will happen, financially, in the next three months.
Based on your informed analysis, you think a commercial loan of a certain size is a good idea. With that loan, you will run your business, make enough money to pay back the loan and, with any luck, there will be some money left over (what we call "profit").
At the bank, you argue your case to a loan officer who knows how to read financial statements and who has pretty good knowledge of the retail business in your area.
A commercial loan, therefore, is the embodiment of that old expression: Two heads are better than one. If that bank officer agrees to make the loan, it means two people believe the loan is a good idea: you and the loan officer.
More, two people have skin in the game. If you cannot pay back your loan, that would be bad for you and bad for the loan officer. And, if enough loan officers make enough bad loans, it would be bad for the bank, as well.
You want to run your business. The bank wants to run their business. Everybody wants this loan to happen. But, it has to be a good loan. A bad loan is bad for everybody.
Student loans look nothing like this.
Most college-bound students have no clear idea if they will even succeed in college. They have no clear idea what degrees they will earn or what they will do with their degrees, once they graduate. They have no clear idea of the commercial value of their degrees. Most college-bound students look nothing like the retailer applying for a commercial loan.
Even more disturbing, there is no loan officer, because---and you really have to wrap your head around this one---nobody cares if the student will be able to pay it back (government guarantees, you see). The college not only does not care if the student pays back his loan (they are not the lenders), they do not care if the student graduates. For the college, every admission is a financial success. They will make money for as long as the student is enrolled and pays his fees. When the student graduates or drops out---it really does not matter which---they just admit another student.
In the world of student loans, the borrowers know nothing. The lenders care nothing. Only students have skin in the game. Nothing about education loans look like commercial loans.
If the education loan market worked anything like the commercial loan market, a prospective college student who needs to borrow money would have to talk to a loan officer who has excellent knowledge of the education market. The student would present real educational credentials (nothing about playing football or working in soup kitchens) and the loan officer would have an excellent idea of that student's chances of success in college.
By the way, colleges already know which students are likely to succeed, and which not. They just don't care. That is why more and more colleges are eliminating the need for standardized tests, which they ignore, anyway. The tests just get in the way of profits.
And, that is why about half of all students who matriculate for the first time will leave college with nothing, after spending a considerable amount of time and money. And, about half the students who do graduate, finish college only after a lot more time (five or six years, not four) and a lot more money than they anticipated spending. For most students, college is a high risk gamble. And, for many students, it is a disaster.
Furthermore, the education loan officer, if he existed, would have an excellent idea of the market value of the student's intended degree. Oh, you want to spend $50,000 per year, for four years, to earn a degree in lesbian dance theory, from Podunk U? Good luck to you, but I am not giving you any money, since there is no chance you will pay it back. Even if you do graduate.
Colleges may know that many of their degrees are commercially worthless, I am not sure. I am sure the data are out there. I am just not sure anybody cares enough to compile it. But, if education lending were a sane credit market, believe those data would be compiled, just as commercial banks compile a mountain of data on all the various industries.
So, how can the education loan market even exist in its present form? It's the government, dear boy, it's the government. Any time something insane is happening in what should be a well organized credit market---like people getting mortgages they can't afford---you have to know that government is involved, in one way or another.
As things now stand, only students are hurt by loans they cannot pay back. So, why do students take out these loans, in the first place? Friends, there has been a massive, decades-long propaganda campaign run by the Education Mafia and abetted by government. This propaganda is the central element of the Politico-Educational Complex, now running on nearly $2 Trillion of student debt.
From the time they are in elementary school, children hear one message loud and clear: Go To College! It does not matter which college, it does not matter what you study, it does not matter if you have the interest or the aptitude, just Go To College. They hear it from their teachers, they hear it from their parents, and from their friends and neighbors. From everybody they trust, starting from when they are very young, students hear: Go To College. So, they go.
How will they pay for college? Don't worry about that. The government (who will do nothing to hurt you, of course) makes money available, and it will all work out in the end, trust us. So, young people sign on the dotted line.
If you think this all sounds preposterous, if you think I am a crackpot, I totally understand. But now, let's hear your explanation for nearly $2 Trillion of student debt, much of which was used to pay for worthless degrees (or no degrees at all), much of which will never be paid back, much of which is poisoning people's lives. You have to explain the kind of debt that means a generation of young people will not buy cars, not buy houses, not even get married and have children---because they cannot pay back debt that is breaking their backs. In other words, extraordinary events require extraordinary explanations. You've heard mine, I'll wait for yours. (I'm not really holding my breath.)
Finally, before we consider possible solutions, think of the individual with a back-breaking student loan. He is not an idiot. He was not trying to cheat anyone. A young and terribly inexperienced person was depending on people he trusted to guide him. He thought he was doing everything right.
Instead, everything has gone wrong. He is certainly not living the life he expected and that he thinks he deserves. He thinks, with considerable justification, that he is the one who has been cheated. And he is angry. Very, angry. Consequentially angry. He, and some 40 million people just like him. And they vote.
What to do?
I hope it is clear, at this point, that the young people taking out those ill-advised student loans are not the bad guys. They were not stupid or irresponsible, they were young and inexperienced. They were not trying to defraud anybody. Indeed, I think they are the primary victims in a confidence racket, run by institutional players, that transfers money from poor people to rich people.
Should these young people have known better? I suppose I have to say yes. And, however we solve this problem, it will have to cost them something, if only to make sure future students consider student loans with more care.
However, the real bad guys are the colleges. They knowingly admit students unlikely to succeed, and they offer worthless degrees at astronomical prices. Colleges are the major beneficiaries of the student loan racket. In one way or another, they have to pay a price. So, where to begin?
The First Rule of Holes states: Stop Digging. Meaning, the first order of business is to stop creating new student loans. This is the easy part. Starting, say, November 1, 2021 all new student loans can be discharged in bankruptcy. Now, watch that market dry up.
As part of draining this financial swamp, it would be great to do something about college admissions. I would like to see all colleges come with a money-back guarantee. There is a lot to unpack, here, but the basic outline would be something like the following.
A student who has not graduated should get his money back on demand. In return, his transcript is wiped clean. It would be as if he never attended.
Do not imagine this is cost-free to the student. Sure, the student will get his tuition back, but room and board, transportation, textbooks, lab fees---that money is not coming back. And then, there is all the time the student spent at that college. He is not getting that back, either.
Finally, note that if the student wants to start over at another college he would have to start from scratch because he does not have a transcript. He would have no credits to transfer.
The student is spared from possibly ruinous debt, but he doesn't get out of it unscathed. This should make students think harder about taking out student loans, and about going to college, at all, but not destroy their lives.
The cost to the colleges may seem obvious, but there is more to it. Colleges will quickly notice which students are more likely to demand refunds, and they will quickly notice which degrees are returned more often. Fairly quickly, I predict, colleges will stop admitting students unlikely to succeed, and they will stop offering commercially worthless degrees.
As for graduated students, many people do not understand the worthlessness of their degrees until they try to get a job. Therefore, a graduated student should be able to ask for his money back within, say, four years of graduation.
When the graduated student asks for his money back then his transcript is wiped clean and his diploma is revoked. As with the undergrad, the graduated student does not get back his time or his ancillary expenses, which are considerable. He also has to explain to prospective employers what he did for four (or five or six) years. None of this will be easy, but at least we are not destroying their lives with unmanageable debt.
Now, some people may object on the principle that you can give back credentials but you cannot give back an education. It looks like students could game the system and get a tuition-free education.
Not to worry, there is plenty of evidence---it's a virtual certainty you have see some of it yourself---that a college education, per se, is worthless. That is why, for example, the average college student spends less than twenty hours a week---including class time (!)---on education related activities. You might think college students learn nothing because they put no effort into it, but the truth is just the reverse. Meaning, students respond rationally to college.
Students do not pay for a college education, they pay for a college degree. It's the degree that signals prospective employers they should consider you for the job. So, you give back the degree and you give back everything.
So, that is how we stop growing new student debt. It remains only to figure out what to do with existing student debt.
I do not see many options, here. The debt will have to be forgiven, mostly or entirely. The one thing I want to make sure of is that taxpayers do not eat all the debt.
Most students have already been paying on their student loans, sometimes for years. So, former students have been absorbing plenty of pain.
I think the people who most benefited from this educational Ponzi Scheme, the people who are most responsible for it, have to be made to absorb their fair share of the pain. In one way or another, the colleges must be made to pay.
