Last week we discussed the smart way to do college. The college system isn’t perfect, so it’s up to students to pursue college in an intelligent way: decide on a good career first and then pick a major that will equip you to excel in that career. Then after those decisions are out of the way, choose a college that is well-equipped to teach you that major. But none of this actually solve the root issue. Here’s my proposal for how to solve the student loan problem.
My proposed solution: Just make student loans illegal
No seriously. It’s illegal to give predatory loans for mortgages or cars, so why is it legal to prey on college students? According to debt.org, Predatory lending can be “any practice that convinces a borrower to accept…a loan that a borrower doesn’t need, doesn’t want or can’t afford.” Based on our imaginary conversation with the loan officer in part 1, it’s hard to deny that the student borrower can’t afford a student loan.
Imagine you’re about to graduate high school and you go to the bank and ask for a $100,000 loan.
Loan Officer: What do you have for collateral?
17 year old: I’ve got an Xbox and that’s about it.
Loan Officer: OK, let me see your bank statement.
17 year old: I’ve got a thousand dollars in my checking account
Loan Officer: Um, do you have two months of pay stubs?
17 year old: Yep, I’ve been working part-time at McDonalds for the past year making about $600/month
Loan Officer: HAHAHAHA good joke. REJECTED.If we make student loans as difficult to obtain as mortgages, then only those people who are credible will be able to obtain them. It won’t completely eliminate defaulting on student loans but it should decrease it significantly.
I can hear you complaining about it already:
But that would make it harder for poorer families to send their kids to college!
Yes, yes it would. It should be harder for poorer people to buy expensive things. I know that’s not a particularly empathetic position, but that’s just how life is. It’s harder for poorer people to buy houses, cars, and luxury trips to Europe. The reason college is so expensive is because everyone can pay for it whether they can afford it or not. Predatory student loans deceive poorer families into believing they can afford a small private liberal arts college when they can’t.
Now I’m not saying that poor people don’t deserve to go to college. But I am saying that lying to people and telling them that they can have everything they want, all they have to do is take on $50,000 in debt, is not kind. Saddling poor people with student loans that can last multiple decades is not helping them. It’s a hindrance. According to the National Consumer Law Center, over 2 million federal student-loan borrowers have been repaying their debt for at least 20 years.
But college is a means to raise yourself above your current economic condition!
Yes, it is–or at least it’s supposed to be. The problem is that having recurring student loan payments makes it really hard to rise above you current economic condition. According to EducationData.org, 30% of black college graduates with student loans default in the first 12 years of repayment. For 1/3 of black graduates a college degree didn’t even make them enough money to pay their college debt!
College is only useful if it teaches you marketable skills. Otherwise it could bankrupt you for life!
Eliminating student loans will make college cheaper
EducationData.org reports that 30% of college students obtain student loans. So if we outlawed student loans, then college enrollment would drop by 30%. This would put a strain on colleges, pressuring them to lower tuition if they want to attract more students. Remember that at the end of the day colleges are just businesses looking to make money. They’ll follow the laws of economics and set prices at the optimum level to attract buyers (students). The reason tuition keeps outpacing inflation every year is because people keep paying for it (with student loans).
We have seen how the availability of loans increases prices. Until recently car loans were usually 3-5 years in length but within recent years 7 and 8-year car loans have become the norm. This increase in loan availability has causes the automobile market to outpace inflation. Put plainly, the reason cars are so expensive now is because car loans are more easily available. An 84-month car loan will have lower monthly payments than a 60-month loan so consumers then opt for the more expensive car.
The same thing has happened to the housing market. Housing has skyrocketed past inflation because of the relative ease of getting a mortgage. I know we discussed how difficult it was to get a mortgage in part 1 of this series (and it is), but compared to any other type of loan a mortgage is really easy to get. 30-year mortgages were virtually unheard of before the 1950’s. Now nearly every mortgage is a 30-year mortgage. Because of the ease of getting a 30-year mortgage, home buyers often end up buying much more house than they need.
In 1950 the average new house was 983 sqft. (source) as opposed to 2020 where the average new house had 2,333 sqft. People are able to “afford” more house because a 30-year loan has lower monthly payments than a 15 or 20-year loan. But are they really able to afford it? With a 30-year mortgage you will end up paying more interest than the initial value of the house. According to nerdWallet “37.6% of households headed by people age 65 to 74 had a mortgage on their primary residence in 2019.” If you still don’t own your house by the time you’re 70, could you really afford it?
Student loans just allow you pay for that increasing unaffordability for the rest of your life.
Allowing huge loans causes prices to go up, because consumers think they can now magically afford it. But all that does is saddle them with crippling debt. This is the same as college! Student loans don’t make college more affordable, they make it less affordable. Student loans just allow you pay for that increasing unaffordability for the rest of your life.
Eliminating student loans will make college degrees more valuable
Eliminateing student loans would also have the effect of making college degrees more valuable. If fewer people were able to obtain a college degree then it becomes more valuable. In 1950 only 6% of Americans had college degrees, as of 2020 37.5% of Americans have college degrees. You have people going to college who don’t care because “a college degree is required to get ahead”.
The reason that’s true now is not necessarily because a degree helps you get ahead. It’s because not having a degree gets you left behind. College nowadays is like high school was in the 1800’s. Only so many children went to high school so a high school diploma was valuable. Then by the 1900’s when high school became mandated, a high school diploma became less valuable.
The more people who receive a college degree, the less valuable it becomes. That’s why you now need advanced degrees in many fields. If we make college out of reach for a good portion of the population that will increase the value of a college degree. This will also give employers a much-needed kick in the pants to show them that maybe a 4-year degree shouldn’t be required for most jobs. Maybe a B.A. in English doesn’t make you more qualified to be an administrative assistant than anyone else.
Many employers require 4-year degrees for roles that don’t need a 4-year degree. They are still super important for technical positions, but hiring a kid with a bachelor’s degree in psychology over someone with an associate’s degree and 20 years of technical experience for a supervisor position needs to stop. And maybe making college degrees rarer will show employers that they’re often not really necessary.
A Less Extreme Solution
So I know outlawing student loans entirely is an extreme solution that will probably hurt people, but I think it’s a good starting point for conversation. Maybe don’t outlaw them altogether, but what if we did require the kind of rigor for student loans that we do for mortgages? What if we required a sort of collateral for student loans? High school seniors may not have something valuable enough to ensure a $50,000 loan, but what if we put the student’s decided major down as a way to ensure the loan?
The loan shark (I mean servicer) can check the student’s major against the median salary for recent graduates with that same major and offer a loan accordingly. Students that go into engineering or some field that traditionally pays a lot will be able to qualify for a larger loan amount because the loan servicer has a greater assurance that they will be able to repay the loan. A student who picks a major that traditionally pays less will qualify for a lesser amount because they are more of risk to the loan provider.
Another idea would be to not offer student loans to students. Offer them to the student’s parents who have a job. car loans require a job, mortgages require a job, shouldn’t student loans require a job as well? And this kind of loan already exists; it’s called a parent PLUS Loan. Maybe these should the main type of student loan rather than some fringe option.
Conclusion
Anyway those are some ideas I’ve had to try and tackle our ever-increasing student loan problem. And it is a problem. Student loan debt in the United States totals $1.73 trillion and grows 6 times faster than the nation’s economy. I believe the main culprits behind the student loan problem are the predatory lending practices of the loan servicers and the fact that the federal government guarantees all student loans.
And this isn’t to say that college is stupid and all student debt is bad. I know many people who got student loans to go to college and when they graduated they worked really hard to pay them off. If you pursue college with a solid plan and a clear goal it can be a great tool. The problem is that predatory student lending has made it possible for everyone to go to college whether they can afford it or not. And if someone can’t afford college letting them take on a lifetime of debt won’t help their situation.
What do you think? Is my proposal to outlaw student loans crazy? How would you solve the student loan debt problem? Let us know in the comments below!
