Student loan debt is a monster problem.
But it doesn’t have to be, and it shouldn’t be.
There are a host of reasons that have contributed to the current crisis, but here are the main issues:
- Higher education is too expensive.
- The government shouldn’t be financing or guaranteeing student loan debt.
- The ability to pay back loans isn’t 100% income-based.
This may seem like an insurmountable task that we couldn’t possibly see resolved in our lifetimes, but that simply isn’t true.
Greed and Government Interference Created This Mess
Colleges are expensive because we’ve been sold on the “fact” that higher education, no matter the cost, is a ticket to success. Students even believe that the more expensive a college is, the better their opportunities will be once they’re in the job market.
To justify the exorbitant expense of higher education, colleges (including state schools) build luxury dorms, gourmet dining rooms, and lavish athletic centers to attract students.
Facilities are costly to build and run. Staffs have become egregiously bloated, not with more professors, but with administrators.
But none of that matters, as long as there’s money – a lot of money – coming in to pay for it all.
And that money is there. The government guarantees student loans, meaning both lenders who make money available and investors who buy packaged student loans are protected from defaulting borrowers.
Ultimately, taxpayers are on the hook – that’s what “government guaranteed” always means.
If for-profit and so-called non-profit colleges and universities weren’t lavishly government funded, they’d be far more cost-conscious, more education-minded, and infinitely more invested in the future of their students.
This Is Fixable, Pure and Simple
The simple solution is having colleges and universities finance students attending their schools.
Yeah, it’s that simple.
Colleges and universities can easily set up their own financing facilities for students attending their schools.
One way money could be raised is by issuing bonds with the college’s facilities as collateral, and having their reputation and credit rating be a determining factor in their cost of capital.
And that’s just one way; there are lots of other capital markets facilities by which schools could raise loan capital pools.
If colleges financed students’ attendance, they’d be directly impacted by the ability of their students – whether they graduate or not – to repay their loans.
What better way to improve both the quality of education and how schools prepare students for the workplace than to tie the education facility’s repayment of the money it’s owed by students (and thus, its future) to the earnings potential of its students?
There just isn’t any better way.
As far as interest on loans, it should be zero until the borrower is working. Since most jobs out of school are starter positions, interest should be charged accordingly. A thirty-year payback period and a tiered rising-rate schedule, divided into three 10-year periods, makes sense.
Repayment of an education loan, like most loans, should be based on the useful life of the asset being financed. In the case of an education that could be a lifetime, but 30-years is enough.
On the repayment side, student loan payments should be directly tied to the borrower’s income.
Why not have 3%, 4%, and 5% (each over a 10-year period) of the borrower’s gross income collected through payroll withholding?
That wouldn’t be too burdensome for borrowers and automatically adjusts as earnings change, either up or down.
Borrowers could even prepay outstanding balances if they can, to save on interest charges.
Ultimately, positive repayment histories would enhance issuers’ credit ratings and lower the cost of capital they raise to lend to their students.
Institutions whose students aren’t able to repay loans in a timely fashion or who experience high default rates will have to manage better student outcomes or go out of business.
Getting the government out of the business of student loan financing and making higher education institutions responsible for their students’ financing and repayment of their loans is a simple.
This is an easily workable solution to one of the greatest challenges we face in America, but we won’t see it until universities are made to answer to their greed.