Mind Readings: Student Loan Forgiveness

Let's get myself in a whole bunch of trouble. In this episode of Mind Readings, let's talk about the current discussions about student loan forgiveness. Now, some disclosures and uh potential, I don't know, they're no longer conflicts of interest, but they would have been a once upon a time. I worked in the financial aid industry for seven years from 2003 to 2010. I worked at a loan marketing company, a company called Student Loan Network.

And my job, the job of the company, was to get people to take student loans. So I have a pretty good knowledge of the system. I used to teach uh how to fill out the free application for federal student aid. Uh I used to run uh the very first and to my knowledge at the time only financial aid podcast, which ran from twenty two thousand five to twenty ten. And I authored a book, uh six editions worth called Student Scholarship Secrets.

So I know the space reasonably well, and for the most part, things have not changed a huge bunch. There's been some changes and some modernizations, but the loan programs are still pretty much the same. So, first, what is the situation? Well, we have one point something trillion dollars of student loan debt, and a variety of folks are campaigning to have the government uh forgive those, to erase those. Uh this has provoked very strong reactions from a bunch of different perspectives.

Some people saying it's a handout, some people saying they people shouldn't get things that they didn't uh that they uh assigned for voluntarily uh erased, other people are saying it's a massive drag on the economy, uh, and saying that it would um uh the the college loan system itself uh is they use the word scam, it's not a scam. What's the answer? It's a lot more complicated than that. Here's why we're in this situation. In a normal business, the economy econ 101, you have supply and demand.

Schools have supply, students buy educations, right? That's what you're doing. You're buying an education. The challenge is colleges are fairly expensive, right? They're expensive businesses to run.

They are businesses. Let's be clear about that. They are businesses because in the United States of America, uh, we do not invest in our citizens beyond um secondary education. Uh after high school uh is our conclusion as a society that uh our obligation to our citizens is fulfilled. And that was a large it's largely a reaction uh to the fact that we're a 250 plus year old country, right?

A 12th grade education in 1812 was a really good education, right? It was uh you didn't need much more than that in life. You barely needed a uh grade school education. Fast forward 200 some odd years, and you obviously see how that did not keep up with the times. People would not go to college unless they had a lot of money, right?

Because colleges were expensive, and in the first 200 years of the country or so, um, college was reserved mainly for rich people, right? And de facto mostly white people. And so in the 1960s, the Higher Education Act was passed and allowed for, among other things, an initiative to try and get more people who are not rich and not white to go to college. The challenge is um instead of investing in the citizens, we created a lending program. We created these lending programs that allow people to borrow money to go to college.

And this creates the third payer problem. If I, as a business, set prices and my prices are too high, customers will not buy. That's basic economics. If I set my prices low enough until there's an equilibrium where I can get the maximum price I can extract from the maximum number of customers, my business will do well. If my prices are too low, I'll get overwhelmed, right?

If my prices are too high, demand drops. This lending program artificially changes the number of available buyers, right? Because if you charge a high price and then you inflate the ability for buyers to buy by lending them money, you can now charge higher prices. And so what has happened in the last 60 years is that colleges have really had no incentive to control prices. None.

Because every time uh student aid increases, loans, colleges can raise tuitions, right? When I went to my undergraduate school in 1993, it was $25,000 a year. This year it's like $70,000 a year. Same education for the most part, right? The diploma is pretty much the same thing.

The quality education is still pretty much the same, but the prices tripled, right, in 30 years. I can't think of too many other things that have tripled in 30 years, right? Certainly wages have not. And so what you end up with is this quandary where colleges have no incentive to control prices. And thus it is the citizens that get stuck holding the bag.

They have to take out loans if they want to go to college. And you've we've also created this artificial demand for college education by saying that it is the uh guaranteed path to prosperity, right? Get a college degree, do better in life. That's also not true, right? Ask ask anybody who's a plumber or an electrician how much their college degree did or did not, you know, having a degree did or did not make a difference in their lives, right?

When they're charging $250 an hour to fix that busted pipe in your basement, there are many, many paths to prosperity, right? There are many, many paths to doing well in life. And the myth of creating this compelling demand that you must go to college to succeed in life, is part of the reason why so many people entered into so much debt. Now, if you want to stop spiraling student debt, you have to enforce price controls in colleges, right? That's the easiest way to control that.

And they colleges can feel free to opt out of that, but in exchange, they would no longer be eligible for, say, federal financial aid. That would stop that pricing in a hurry. Healthcare, by the way, in the United States, is exactly in the same mess, right? Because of health insurance, healthcare companies have no incentive to control costs because they know they're going to get paid because their customer is not you or me. Their customer is the insurance company.

And so the insurance companies can then raise rates on customers, and you get this kind of nice uh insurance industrial complex with this insurance educational complex. Now, how do student loans work? Well, until 2010, uh, federal student loans were available from the U.S. government in two different flavors. So it was called the Direct lending Program and the Family Federal Education Loan Program, FFELP.

Um, of those two, the second program, the F FFELP program, was by far the largest, right? It was it was hundreds of millions, billions of dollars. The way it worked was that you would fill out a loan application, and assuming that you were approved, um, because you met the qualification for federal financial aid, you would uh then be sent to a bank, and the bank uh would issue you a loan. And the guarantor of that loan was the federal government, which is a fancy way of saying that if you didn't pay the loan, Uncle Sam would foot the bill and then come after you, right? And the second program, the direct lending program, is you would just borrow money straight from Uncle Sam.

Now, in 2010, that all changed when all federal student loans became uh run by the government. Banks were cut out of that. That's something that the Obama administration, I think correctly did, even though it literally put me out of a job. Um, because uh at that point you're taking away uh the marketing aspect of banks. Um, but to this day, banks still hold billions of dollars in federal student loans.

That part's important. Uncle Sam holds the rest. Federal student loans, student loans, there are private student loans, loans that are issued directly by banks without the government's involvement. They're relatively rare because they have extremely high interest rates because there's no collateral, right? When you take out a mortgage, there's a house, a physical structure, a piece of land that the bank can seize if you don't pay it back.

With a student loan, there's nothing to seize, right? So they as a result, banks did not offer these loans until the federal government stepped in and said, Yeah, we will foot the bill if the if the uh student doesn't pay, and that way there's no risk to you, the bank. So there's a couple weird things about student loans. Um the main one is this they cannot be discharged in bankruptcy, right? If you go bankrupt, um you can't pay your credit card or your mortgage or whatever, you can declare bankruptcy, and for seven years your credit is trash.

You can't borrow anything, um, and you can be sued and have stuff taken away. You can have your wages garnished, uh, you can lose your house or your car or whatever other things. Um, those are all penalties of bankruptcy. Student loans don't fit in that category. Um, they cannot be discharged in bankruptcy.

There are rare conditions in which they can be discharged, but they're extremely rare. They um, unlike regular debts, they do not follow uh your heirs. So, like if you die, your loan dies with you. Um pretty clear that we don't want people to die just to get rid of a loan. Um, how do we deal with this situation?

Well, first, ask yourself who benefits from loan forgiveness. Yes, the individual who owes the loan benefits because they don't owe the loan anymore. But all those banks that have those hundreds of billions of dollars are going to get a really nice payday if we forgive those loans, because they're essentially get a big pile of money from Uncle Sam saying, Hey, we're we're done, we've paid it off. Now, the loans that are owed directly to Uncle Sam, those just vanish into the ether, right? Because all money is fictional and the government can just simply erase them.

But for those banks, they're gonna get a big old payday. Uh and put on your tinfoil hat. It would not surprise me if they were if some of those banks were not helping uh the campaign for loan forgiveness because they will make out really, really well. Um, the one of the re main reasons not to do this is because of what's called moral hazard, which is when uh if you do something that shows people there is no risk to taking an action, uh they will do it more, right? If you can show that there's no risk to borrowing a whole bunch of money because you won't have to pay it back, people will rationally borrow a lot more money.

It's free money. Why wouldn't you do that? Um so there is that risk of a loan forgiveness program. The easiest way, and the way we should have addressed this issue was to never have let it happen in the first place, because in the 1960s, instead of creating a lending program, we should have just subsidized higher education. That let's update our country and follow in the paths of most uh other civilized nations and make higher education universally available.

Now, of course, like if you are a resident of France or Sweden or Germany, you can go to a private college on your own dime, but you can for sure get a higher education at very minimal cost in exchange for much higher taxes. There are a whole bunch of reasons why we didn't do that, but a lot of it has to do with our favorite isms, right? Racism, sexism, and classism. The United States is consistently underinvested in anything that could be uh taken advantage of by people of lower economic status and and uh typically non-white status, and as a result, um we have imperiled entire generations of people of every color because we just don't invest in our citizens. We invest probably half of what other civilized nations do in things like health care and education.

So, how do we get out of this? Well, the path forward is clearly not blanket erasure of loans, right? Because a moral hazard, B, sweetheart deal for the banks. Uh, and that's not a great use of taxpayer dollars. In higher education, one of the things that you have uh before you're allowed to take out a loan is a test called ability to benefit, which is part and parcel of what's called satisfactory academic progress.

And as part of your college application and the financial aid application, you have to demonstrate that this investment by the US government uh in you is worthwhile, right? That you're going to sh to be able to benefit from it. When we talk about loan forgiveness, there is no reason why we cannot continue to look at the way people are using the investment we made in them and weigh whether that whether forgiveness is a valid choice. We already have some loan forgiveness programs in place. They already exist.

There's one, for example, called the teacher loan forgiveness program, where in exchange for spending four years wherever the Department of Education sends you, uh, your loans can be just made to go away. Um, the government forgives them because you are serving the government, you're serving the country in a way that benefits the country by taking the skills that you acquired and the degree you acquired and teaching in, you know, like eastern Washington State or Northern Texas or someplace where we can't get enough of a certain type of talent. Think about all of the things that we desperately need in America right now. We need teachers, we need nurses, we need accountants, we need people to work in grocery stores, we need people to, you know, the we talk about these massive labor shortages and the great resignation. We need people to be doing a whole bunch of things.

And so instead of just saying we're gonna forgive it all, magic wands gone, we could say, well, what if we focus on the things that we need the most? And if you have those uh loans still in existence and you have the degree, you you did a great job, you graduated college, you have a degree in finance or uh healthcare or whatever, apply for a loan forgiveness program, and then for two to four years, we send you to a place where we need the help as a country, you serve your country, and then poof, then it's gone, right? So it's it doesn't create a moral hazard because if you know going into the deal, I'm gonna have to repay this one way or the other, um, you're less likely to just borrow money thinking it's it's completely free falling from the sky. So that's one potential option. The second option would be to look at the lending data and the financial data of the citizens impacted and make some decisions about you know what is the the ability for a person to repay a loan.

Right. If you are making $140,000 a year and you know, you have uh $300 a month apartment and stuff like that, you don't need loan forgiveness, right? Uh if you're living you know reasonably responsibly, you can afford to pay off your student loans. Um now, if you're making $20,000 a year as a barista, you know, part-time barista, and you uh just don't have the ability to repay, and you're already on uh you know various federal programs for assistance, it can be rolled into that. There are different ways that we could slice and dice this problem to address it to make sure that it is most equitable for the people who are harmed the most without creating moral hazard.

But what we probably should not do is just make wave a magic wand and make it all go away. I'm personally a fan of the loan forgiveness programs, right? Something like AmeriCorps or any other program where we want people who are well educated people to reinvest in America, to reinvest in the country, to do things for the country. Um whatever that looks like, whatever form it takes, there are no shortage of nonprofits that desperately need people, right? And they can't pay what the commercial sector can pay.

But if the part of your compensation was four years of service for loan forgiveness, suddenly that job that pays $20,000 less per year for the than the private sector gets a whole lot more appealing if $100,000 of loans just go away for you, right? And the last thing that we absolutely should do is eliminate the restriction on bankruptcy. Student loans should be dischargeable in bankruptcy because when you declare bankruptcy, you pay a very heavy price for it. You can't buy a car unless you pay cash, right? You can't buy a house.

It's not something you do lightly, uh, or it shouldn't be. And so having student loans also be something that can be discharged in bankruptcy is not a bad thing, right? Again, the moral hazard there is relatively low because declaring bankruptcy trashes your life for the better part of a decade. But that's better than your life being partially trashed by student loans for 25 years, right? Uh so you you can do the math.

So is there a clear answer? No. There isn't. It's a very complicated system that is 60 years worth of passing the buck to future generations, and the bill is coming due. And all of us who are have repaid our loans, usually at very great cost, are understandably not thrilled about the idea of other people not having to pay back that same kind of debt that we all voluntarily entered into.

We all signed on the dotted line. Every one of us read the paperwork, understood what we were getting into, you owe this money. At no point did somebody say, hey, this is free money, and then you know, uh bait and switch. Um let's figure out a way to make it manageable to get people to give back to America and to treat it like every other form of debt. I think those are probably three good pathways to resolving the crisis that is of our own making and that everybody has some culpability in.

And if we get substantial pushback, one of the questions we have to be asking is well, who financially benefits from things not changing or from a certain solution, right? Again, think about it. Who benefits if you just make a bunch of loans go away? A whole bunch of banks do that don't need the money, right? So give that some thought.

I'm sure you have some strong feelings of your own on the topic. Feel free to put them in the comments. Uh I will moderate comments that are just outright uh incorrect uh or outright abuse of a hostile. So just know that if your comment was inappropriate, it will go away. Thanks for watching.

I'll talk to you soon. Take care.