The Current American Student Loan Dilemma

These days I get a lot of inspiration by reading social media and discovering the extent to which even highly educated and well-meaning people have assimilated views that are so contrary to fact as to be astonishing.

Yesterday, a good friend of mine put a cartoon up on his Facebook page which made fun of students who find themselves unable to repay student loans. The cartoon said, “You took out a loan, pay it back.” The caption read “Student Debt Crisis Solved.” When I objected, he was joined by another good friend of mine who declared the crisis to be the making of the “Education industry” to which I and Terri belong.

When Terri and I went to college, the loan default rate was de minimus. The primary reason back then that a student might be unable to repay a loan was the occurrence of a major illness or injury. As percentages go, these fell in the level of defaults that are tolerated and excused by most financial institutions.

Most loans in those days were extended by generous federal programs that provided low interest and convenient terms. These loans were intended to encourage young people to attend college which in turn was seen as a public good. They were very successful in that regard, and many a practicing engineer, scientist, educator, doctor or lawyer today owes their undergraduate degree to these programs.

Today, the situation is very different. There are a large number of student loan defaults. What happened?

The first major change in the education economy took place not long after Terri and I completed our educations. Banks and financial institutions had been angry for many years because they saw the government loan programs as competing against their primary business. They did what businesses do in the American political landscape: make political contributions and hire lobbyists to change the law. And they were wildly successful. The loan programs which allowed Terri and I to go to college were effectively ended. Instead, families needed to go to banks where they were charged closer to market interest rates.

Even so, the loan default rates remained low. And actually, if you look at American education today, there is no “debt crisis” among most students. Most students attend state or public universities, or responsible non-public universities that provide subsidized tuition along with an education that will allow students to pay off their debts once they graduate.

There are two areas where this is not so. The first are non-public universities which are legitimate providers of education, but have low endowments and few resources to help their students. These colleges often charge enormous amounts for tuition and students graduate with an amount of debt the jobs they obtain simply cannot sustain. There’s no question that this is a problem which high school guidance counselors and other advisers need to do a better job explaining to families. And many of these places would simply close if banks were told that they would not have government assistance in collecting delinquent loans.

By far the biggest area for “student debt crisis” is outright education fraud by for-profit schools that charge high tuition and have partnerships with financial institutions that use various governmental guarantees to make loans that they would never make if they actually had to withstand the defaults. You see advertisements plastered over every public space offering education to place students in “high paying” IT jobs, hair dressing jobs, office jobs–jobs that in fact don’t pay enough to manage the debt and often don’t exist at all. The current president of the United States thought that sort of school was a great profit-making idea and complained bitterly when he had to compensate the students for fraud his company perpetrated.

All of this has happened because lobbyists have pressured the federal government. Not just eliminating the old federal loan programs. They also passed laws that protect financial institutions by guaranteeing what are obviously bad loans. And the most recent strategy has been to enact policies that allow private companies that provide little or no real education to access those loan guarantees. The president even appointed a prominent advocate for that sort of private fraud to be the Education Secretary of the United States.

The “student debt crisis” has been manufactured by banks and politicians who argue that they are supporting the “free market.” But in a free market, banks and schools would not be allowed to extend credit for programs that cannot be economically justified. You see, in a real free market, customers can walk away from bad deals and the purveyors of those deals can suffer the consequences.

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