Believe It or Not: There’s a Simple Fix to the Student Loan Crisis

23 | By Shah Gilani

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.

Here’s the simple solution that fixes the systemic issues in higher education financing…

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.



23 Responses to Believe It or Not: There’s a Simple Fix to the Student Loan Crisis

  1. John says:

    A voice of reason. You should speak in front of our legislators. I also would recommend a truth in lending statement tied to the projected income of the students selected career .
    Thanks , John from Jersey

  2. Jim says:

    Excellent article and insight. It wouldn’t hurt the governments balance sheet either. It also wouldn’t hurt to refine the requirement for obtaining a degree. One year could easily be eliminated from the standard four now required.

  3. Phebe Dugal Adams says:

    Your solution is simple and workable. I went to a private university in 1944-45 on a working scholarship. I worked part-time on campus to cover costs other than tuition. The scholarship, which covered tuition, was to be repaid, on the honor system, had no payment schedule or deadline. It took me several years, but I did repay it. Without interest. Funding for the scholarships came from the university”s endowment funds and/or special donations by alumni and patrons.
    Worked well until the government got into the act and spoiled things for everyone, destroying moral character in the bargain. Are you acquainted with Hillsdale College in Michigan? They accept NO government funds of any sort; not even by way of students who may have government guaranteed loans. Such students are not admitted. I am not familiar with how they do their own financing, but they do.
    One caveat on your solution. Please do not insist or promote collection of loan payments by payroll deductions. Businesses are already unpaid tax collectors and collectors for social security. Employers should not be required to be nannies for their employees.

  4. Fred Stamm says:

    Right on! You hit the nail on the head. Schools would make sure that students are taking courses that are relevant to their financial success in the real world so they could pay back the loans.Students would have a chance to succeed with a realistic payment schedule.Great idea. It is a change that should happen, but it will take waging a long cultural war with the governmental institutions and the colleges to coerce them to go along. The colleges have a good thing going for them.Time to end the colleges’ gravy train.

  5. Tim G. says:

    Magnificent piece on student loan financing! Pure Genius!
    However, it won’t be enacted, because it is simply too lucrative (& with no risk to institutions) to keep it the way it is & have us taxpayers foot the bill, ultimately.

    • TNflash says:

      I love this tuition payment plan but, you are absolutely correct. I watched states that had reasonable college costs raise their tuition exponentially when the Federal Government starting offering government guaranteed loans and the states passed lotteries to help students pay for their higher education. Voters were trying to help students and provide a reliable pool of educated workers to entice more industry to their states. They forgot that there is greed in education and that universities are in the business to first make money. They secondly provide education to students because it allows them to support reason #1 which is to make money. Just like any unregulated corporate business, they always charge what the market will bear. With the government guaranteed loan money and lotteries providing easy money the tuitions doubled, then tripled, then quadrupled in 5 years time. Greed ruled. The universities were not even satisfied with their insane amount of profit so they then built lots of new dorms and required new students to live in them so they could charge dorm rental fees which were as much as they charged for tuition.
      Today the colleges do not not care if their students graduate, get an education, or even a good job because they already have the students cash and the money from any loans guaranteed by the government (us taxpayers). They currently have no skin in the game. They will resist the passage of any laws that make their income dependant on how well they trained their graduates, or whether or not their graduates can pay for the tuitions they charged them. Elections are coming up. It needs to be changed so lets start a movement to make our politicians make it so.

  6. Coop says:

    This is a wonderful “market based” solution, which would have the added effect of reducing the number of unqualified or barely qualified graduates who are plugging up the job pools and lowering employers recognition of bachelor’s degrees as a reasonable indicator of performance and justification for better salaries. Thus, the graduates would also benefit from an improved financing system and be more able to secure meaningful employment, which would in turn further reduce the risk of default. However, it should be noted that most, if not all, universities today do offer some sort of “financing” in the form of scholarships, and switching to a program such as this could tempt many of them to switch that funding from scholarships to loans, making it more difficult to attract top talent or increase “diversity”.

  7. flycatcher says:

    Dear Shah,

    Some nice ideas there but it puts the burden on Colleges to provide better educations while reducing costs this closes the door on their easy money so I highly doubt it will ever happen. I agree the government should not be in the education business be grade schools or colleges in fact the government should get out of every bodies business. It doesn’t matter how good of an education one gets if there are no jobs paying living wages does it?

      • TNflash says:

        Education is a necessity for the survival of the individual and the country and it is a business. Profits are the number one concern of any college or university and they always charge what the market will bear. That is why tuition costs went up so fast after students were offered low cost government guaranteed loans and states passed education lotteries. Higher education institutions pay no penalty for over charging students, putting their students in a life time of debt, or even graduating them without educating them.

  8. Brian Keith says:

    Shah, you are so right on why college costs so much. I agree with your solutions except for one aspect, why put the burden of remitting payments for student loans on a student’s employer. The employer or payroll company should not be responsible for it. It would be especially burdensome the more employees you have as they could have gone to hundreds of different schools. This means hundreds of different checks/direct debits that would need to be generated every week.

  9. ivano says:

    Colleges will fight this concept tooth and nail… However, it is brilliant. The schools that graduate useless socialistically indoctrinated idiots who plan on working for the government, would be out of business in no time since their graduating students would never pay back their loans to the colleges.

  10. Don Cephus says:

    Great solution. One problem, the institution would have some accountability in this. I’m afraid the institutions have been on breast milk too long.

  11. doc Han says:

    As mentioned above, great Idea, but you have to get 1) colleges to stop their gravy train and 2 get Uncle Sam out of the picture. The later part is isn’t going to happen. Period. Uncle Sam shouldn’t be involved, but shouldn’t and what is politically possible are not related.

    One other plan I heard, is similar. It gets market forces involved. it also has a “subsidized” federal loan part, so it is not dead on arrival. The biggest problem with the loans (my judgment on biggest), is that student are getting loans for educations that will not provide the income to repay the loans. That’s a combination of overpricing and under usefulness of the so called education.

    So only loan to student who have a good chance of repaying. You cannot allow that decision to be made by a government employee, or committee. to many pressures, not enough guidance or insight. So let’s go to the private sector, like FDIC banks. Let them make a college loan, one that can be dismissed in bankruptcy. Then Uncle Sam will loan a similar amount, at a reduced interest rate, and as a debt to Uncle Sam, it does not disappear with bankruptcy. The loan office will have to judge the likelihood of repayment. given the student will also have a parallel government loan. Probably not many loans for .majoring in basket weaving will be issued. And load for nuclear engineering are much more likely, assuming the grades are up enough.

    Then if this were put in place, then Colleges might step up and offer loans also. Or lower prices, or cut back on the amenities for students.

  12. G13Man says:

    college loans should never be for the first 2 years !
    These courses are basic and only needed to re educate the high school failures and to teach real world basics . There fore they should not need expensive any thing …

    Political majors should not get any education loans or assistance … This way they will [ hopefully ] learn real world economics !
    Same for the arts since we want them to have real world environment and feelings [ coddled majors are just whinny ]

  13. Edward J. Doran says:

    You may have outlined possible solutions for students who WILL be going to colleges and Universities in the future. It DOES NOT address solutions for the current student debt. It does not address solutions for the current debt.

    The real problem is CURRENT student loan debts. Just as the US Federal Government has a debt of $19 Trillion and growing. Student debt will slow over the next few years. Why? Students and the parents of students will realize that
    the number of high paying positions available does not equate to the number of graduates annually.

  14. Simon says:

    Great article and perfect solution. When I was in high school ( British) we had a tier system, not everybody is college material,
    Trade Apprentice programs, work day release programs would ensure skilled workers for the construction industries. Your college self funding would also bring costs back down via competition and scholarly accomplishments. Adding further pressure to colleges to provide usefully courses for relevant careers

  15. Colin Everson says:

    Hello to the trained athlete who brings in millions of dollars through sports endeavors. I went to a junior college on a basketball scholarship which was funded in part by a working scholarship. This included, cleaning the athletic buildings, taking care of the pools through back washing filters which make the water suitable to swim in and sweeping the stands for parents to watch athletic events through a paid ticket. This work scholarship was the means for my education. It taught me life lessons, responsibility, work ethic and a sense of self worth knowing you were providing for your college experience. Oh, did I mention this was in the early seventies! It worked for me then and I’m sure it would work today. It makes the student athlete involved in his/her education and stops the athletic gravy train. I’m a better person because of it and taught me the value of education.

  16. Bud Mor says:

    Terrible idea. While there are aspects of this that would be helpful, it would obviously have the consequence of making colleges only educate in business and sciences. It would gut the arts.

  17. EnEm says:

    “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”.

    The default rates could be due to students not finding suitable employment in a market glutted with say fresh applicants with generic Arts degrees. The laws of Supply and Demand take over and the unemployed are then compelled to accept salaries well below the market level. Their 30-year repayment schedule may stretch to 40 years.

    Yes, your theory can be applied……. to ideal market and employment conditions. Having said that, I firmly support your notion that Government Interference should be eliminated and Universities should take on the responsibility.

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