Three-year pause on student loans ends, now it's time to fix the problems
Editor’s note: This essay is adapted from the new, New York Times bestselling book, "You Will Own Nothing: Your War with a New Financial World Order and How to Fight Back" by Carol Roth.
The biggest predatory lender in America is the U.S. government. Imagine tying up teenagers and other young people, sometimes as minors with their parents co-signing, with five- and six-figure debt loads on the back of a flimsy promise of a brighter future. This is exactly what the U.S. government does, without any underwriting process or the possibility of future bankruptcy for the debtors, as they dole out loans for college and university educations.
As payments on the now record $1.77 trillion in student loans (as of Q2 2023) have resumed after a somewhat questionable three-year pause and the administration keeps attempting loan forgiveness efforts, it is staggering that nobody in Congress or the White House has moved to address the root of the problem: government intervention is aiding and abetting the wholesale transfer of wealth from young people to colleges and their administrators.
While taxpayers should not be on the hook for others’ debt, and personal responsibility is paramount, we have to recognize that the current situation is an abomination.
In just about any loan — other than student loans — that an individual takes out, there is an underwriting process. This process assesses the risk of the person not paying the loan back and the opportunity being pursued. This helps to determine the amount of the loan given and its interest rate. The loan is also typically limited to the opportunity assessed. You can’t use your business loan to take a personal vacation, for example.
President Joe Biden keeps trying to forgive student loans. But few seem willing to discuss the reasons for the problem which start with the government.
This process also allows for bankruptcies.
The government, in nationalizing the college lending business in large part, has entirely disrupted this process. There is no underwriting. The "A" student who studies engineering gets the same loan as the "C" student who studies underwater basketweaving. Many students use their student loan monies for Spring Break trips and other expenses. And there is no bankruptcy process, outside of very special circumstances.
This disrupts the pricing mechanism of the degrees and allows the colleges to greatly profit at the expense of young people, with lots of moral hazard and little in the way of improved results.
Not only has the growth in college costs exceed that of inflation, but according to a piece in Forbes, college costs in recent decades have increased at a rate of almost five times the growth in GDP and a staggering almost eight times the growth in wages!
Clearly, while the colleges are taking in more money, they are not producing commensurate value for either their students or the economy at large.
This should be an easy, bipartisan endeavor to get behind, unless the government purposely wants to keep young people from prospering economically.
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The government should be entirely removed from student lending and a traditional underwriting process should be restored, including bankruptcy options.
Colleges must have skin in the game. They could be required to hold part of each loan. Or, perhaps, recourse such as lawsuits could be allowed to be directed at the schools if graduates are not able to use their degrees to better their financial or professional outcomes.
While taxpayers should not be on the hook for others’ debt, and personal responsibility is paramount, we have to recognize that the current situation is an abomination.
Taxpayers give colleges and universities around a quarter of a trillion dollars at the federal and state levels each year directly. Plus, these institutions are granted many other benefits and incentives that prop up their financial positions. They should be able to provide degrees at a price that justifies a return on investment.
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As a nation, we must also do a better job of sharing a variety of educational options. Trade and specialty schools are not only viable alternatives for attractive careers, but we are currently facing a substantial shortage of electricians, plumbers, pilots and other vital skilled workers. Many of these are producing better financial outcomes, including both personal balance sheet and income considerations, than many college degrees.
Having an educated population can be a benefit, but the cost structure in place for many colleges and universities is ensuring the only ones to benefit are the institutions. We must restore market forces to make a wider range of education outcomes available and attractive, so we don’t have a population of educated, broke and despondent young Americans.
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Carol Roth is a former investment banker, entrepreneur and author of the new book "You Will Own Nothing" Broadside Books. Her previous books are "The War on Small Business" and the New York Times bestseller "The Entrepreneur Equation."
