Student loan debt is a monster problem.
But it doesn’t have to be, and it shouldn’t be.
There are three primary reasons we’re in this mess in the first place:
- Higher education is too expensive, which is the fault of greedy schools.
- The government shouldn’t be financing or guaranteeing student loan debt, because it’s easy access to loan money that drives up costs.
- The ability to pay back loans isn’t 100% income-based, but it must be.
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.
A lot of 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 (public and private, nonprofit and for-profit schools) build luxury dorms, gourmet dining halls, lavish athletic centers, and other expensive, often superfluous, trappings to attract students.
Facilities are costly to build and run. Staffs have become egregiously bloated, not with more professors, but with a lot more administrators and “workers.”
But none of that matters, if there’s money – a lot of money – to pay for it all.
And the money certainly is there.
The U.S. government directly and indirectly guarantees student loans, meaning both lenders who make money available and investors who buy packaged student loans are protected from defaulting borrowers.
Ultimately, of course, taxpayers are on the hook – that’s what “government guaranteed” or “free” always means. Just ask the likes of Bernie Sanders and Elizabeth Warren.
If for-profit and so-called nonprofit colleges and universities weren’t lavishly government funded, they’d be far more cost-conscious, infinitely more education-minded, and ultimately more invested in the future of their students.
This Is Fixable, Pure and Simple
The simple solution is having colleges and universities directly 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 for student outcomes and credit ratings be a determining factor in their cost of capital.
That’s just one way; there are lots of other capital market 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 its 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, that is, according to income.
A 30-year payback period and a tiered rising-rate schedule divided into maybe three 10-year periods, right out of college, advancing in one’s career or workplace, and during peak earnings years, 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 more than enough time to pay back loans if a school properly prepares its attendees.
Why not have 3%, 4%, and 5% simple (not compounded) interest rate charges (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 could automatically adjust as earnings change, either up or down.
Borrowers could always prepay outstanding balances if they can or want to, to save on interest charges.
Ultimately, positive repayment histories would enhance issuers’ (colleges) credit ratings and lower the cost of capital they raise to lend to their students.
Institutions whose students can’t repay loans in a timely fashion or who experience high default rates will have to manage better student outcomes or go out of business, as many of them should.
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 fix.
This is an easily workable solution to one of the greatest challenges we face in America.
But we won’t see it until colleges and universities are made to answer for their greed, and governments stop aiding and abetting their usurious behavior.
P.S. – And if you think the student loan debt problem is the only financial problem we’re facing, think again. Look at the world now: a trade war with China is brewing, geopolitical tensions are still rising from Brexit, student loan debt is rising thousands of dollars every second, and it’s all coming to a head at the heart of the American economy like a fast-burning fuse on a financial time bomb. And once this thing blows, you and everything you worked for could be seriously affected. Click here to learn how you can protect yourself from the fallout.