By John F. Di Leo – 
The news of the week concerns the Biden-Regime’s $10,000/student (or in some cases, $20,000/student) loan write-off, being portrayed as a debt forgiveness.
It’s not.
Today, let’s consider some of the basics that the debate has forgotten – basics that involve not only the schools, the banks, and the students, but the taxpayers, the economy, and civilization itself.
Advance warning: this is going to be a long one; it’s a big topic.
Moral Hazard
Think of the famous concept of the “butterfly effect” – the idea that every action might be a cause of other, possibly unanticipated results down the line. When a pundit or economist refers to “moral hazard,” he means that the proposal on the table will likely cause even poorer choices in the future, leading to even more destructive results.
- If the problem at hand is caused by people taking on loans they can’t or won’t repay, then forgiving them will cause more people in the future to do the same.
- If it is caused by banks (or in this case, government) foolishly extending unsecured credit beyond any anticipation of full repayment, then those banks (or in this case, government) will continue to do so, jeopardizing our very economy system.
- If it is caused by colleges and universities already setting the costs of tuition, books, and room and board too high for people to afford, then this “forgiveness” encourages these colleges and universities to continue to set these costs irrationally high in the future.
In short, the moral hazard argument is that the proposal on the table not only doesn’t solve the real underlying problem, it’s worse than that: by rewarding bad behavior, the alleged solution will actually cause the underlying problem to worsen.
Loan Forgiveness
Who can forgive a debt? In fact, only the person who makes a loan of his own surplus can really forgive a debt.
- If you loan $100 to a friend, taking money of your own out of your own wallet when you have no other obligations on your money, then sure, you can choose to forgive that debt.
- But what if you’re carrying your roommates’ money to pay the landlord for your shared apartment, and you loan that hundred to a pal? You have obligations on that money. Your roommates trusted you with it. You still have to pay the landlord, and you damage your roommates’ credit status as well as your own, if your imagined “generosity” causes you to miss that rent payment for all of you.
- In short, if you are representing others, as in the case of our nation’s politicians, you have an obligation to all your constituents, not just to the “squeaky wheels” who are having difficulty paying off a loan. This obligation to the entire economy, and specifically, to current and future taxpayers, outranks any desire to be magnanimous with other people’s money.
- An added complication here is that in many cases, the loans in question are not currently owed to the original creditors. In the majority of cases, students didn’t borrow the money from their colleges; they borrowed the money from a bank, who later sold the debt to another bank, who later sold it to the federal government. The colleges might have been in a position to consider forgiveness, once upon a time, long ago… but they have no debts to forgive today; they were made whole, years ago, and are not party to these current loans at all.
Interest and Principal
These outstanding balances aren’t what the students spent on their education. Remember that banks are constantly buying and selling bundles of their existing notes, especially as they undergo mergers, acquisitions, bankruptcies and expansions.
As a result, the current holder of the note is someone who bought that note, and paid for it in full, on the expectation of collecting the agreed payments at the agreed interest rates (and penalty schedules) going forward.
- Today’s balance therefore represents a combination of tuition (and other things) and the interest of one or five or ten or twenty years, as the student has postponed paying it off.
- We might be able to renegotiate future interest rates, looking forward, to reduce its rate of growth… but the past interest is done; it’s out of our hands. There is no longer a real distinction between the original debt and the interest thus far. Past owners of the debt – the last bank, or two banks ago – had a bundled total, representing principal and interest together, when they sold the debt. The current holder bought a package deal, so to speak. A single total.
- People tend to conveniently forget that student loan interest is higher than many other interest rates for a reason. It HAS to be higher. With anything else – a car, a house, a gift, anything else you buy – you start making payments the next month. With an education, these student loan payments are postponed until six or twelve months after you graduate. The bank paid out that money four and half, five, even six or seven years before you ever started paying it back. The interest has to cover that long period retroactively. It HAS to, because that’s how long the bank has been out the money. With your very first payment, they are already out several years of use of those funds. As much as a student may think it was a bad deal for the student… it was already a worse deal for the lender.
- So, today, when people propose to “just let them pay the principal and waive the interest,” in most cases, they’re asking for an irrelevancy. When the current holder of the debt bought that loan, it was a single figure; the distinction between principal and bank interest evaporated with the transfer. For the current holder of the debt to agree to reduce a portion, he’s not reducing his total profit on the loan like people think. They assume “if you drop it from 8% to 4% retroactively, you’ll still make 4%, right?” The current lender can’t renegotiate on behalf of the prior owner of the debt. You’re asking him to accept far less for the note than he already paid for it.
College Tuition and Financial Aid
Colleges set their prices – not just tuition, but room and board, books and supplies, activity fees, etc. – based on the same thing that any seller bases his prices on: you charge what the market will bear.
Oh yes, the schools’ real costs play a part, but only a small part. Like any other product or service, the seller looks at the market and figures out what price the market will pay for it.
- Consider how restaurants price their products: if they flood the neighborhood with “25% off” coupons, then their prices are inflated by some figure to allow for that coupon that brought people into the restaurant. By contrast, restaurants that don’t expect their customers to use coupons much will price their products at the real level they expect to collect.
- By the same token, colleges and universities could set their prices at the level they expect their customers (the students) to pay… but most don’t. Instead, they look at what “coupons” are out there for their customers to use, such as federal and state grants, private scholarships, school-provided financial aid, federal student loans, etc., and then set their rates at a level that takes all these programs into account.
Imagine if coupons were eliminated; restaurants would immediately reduce their prices to meet the amount their customers will pay. We don’t need restaurants to do that… but frankly, we do need colleges to do so.
Eliminate these programs, and the schools will lower their prices to a level that more rationally represents a cross between their legitimate cost and what an unsubsidized market would really accept.
The Value of Higher Education
Much has been written about the public debate over the value of higher education today. Some of it is true. Some of it was always false. Some has become false over the years. Consider:
- It’s generally agreed that there are two kinds of degree programs: those that teach you a specific skill and those that teach you a general talent.
- Chemical engineering, neuro-surgery, and business accounting are examples of specific skills that translate directly into a range of job prospects;
- The so-called “liberal arts” like political science, history and English literature are examples of more general talents.
- People often point out that the specific skills, like the hard sciences, provide degrees that are more easily valued: a chemical engineer can expect to earn some specific salary level in industry, while the history major has no direct salary expectation unless he becomes a history teacher. People use this difference to justify the assumption that some degrees are definitely worth more than others, so we should take that into account when designing student loan programs.
- But is it true? One’s job prospects in life are not just dependent on the title printed on that sheepskin; they are also dependent on one’s ability, work ethic, career choices, geography, and range of talents.
- A chemical engineer will earn substantially more money than a poli sci major who serves burgers at a fast food place,
- But the poli sci major who becomes a successful software salesman or purchasing manager will do better financially than the chemical engineering major who works as a lab assistant.
- It also depends on the job market into which the student graduates. If there are good jobs to be had in the business world, even the poli sci major can start that career in purchasing or sales, but if the job market is tight, the engineering major’s odds are certainly far better.
- Nothing is guaranteed; a great deal is still up to the individual.
- As higher education has become more and more specialized over the past century, in fact, there has been a considerable loss, by definition. The business and engineering degrees that leave out history and political science have given us a business world that’s terribly dependent on enemy nations like China and Russia. The liberal arts – before their takeover by the hard Left, at least – provide the important value of teaching students the arc of human history.
Auto loans have the car for collateral; mortgages have the house for collateral. A college degree program is called an unsecured loan because there simply is no inherent value in any degree; its value is dependent on what the student does with it upon graduation, and how well the student can build upon it in life.
That degree is just your foundation; you still have to build the house on top of it, or it’s just a hole in the ground.
Credit Cards and Home Loans
Over the course of our lives, most Americans encounter two different types of loans, and, taken together, they provide a guide to our understanding of the concept of loans and payment schedules.
- You buy a house when the bank has determined that you can afford it. You agree on a term – ten years, fifteen, twenty, thirty – and they apportion principal and interest in a fashion that enables you to pay it off completely in that time. We do the same with cars – splitting it over three, or five years – and the minimum payment is designed for that payoff.
- Credit cards are loans too, but they cannot work like that. We use them to buy groceries, gasoline, dinners, gifts. We use them constantly, so our balances change constantly. The minimum payment is low enough to enable us to show we’re still working – still earning, still honest – but it is not remotely related to the payoff level. You cannot pay only the minimums; everyone knows that you have to pay the full balance as fast as humanly possible. We all know that. It should go without saying.
- Student loans – by necessity – cannot possibly work exactly like either of these models. We can’t expect the debtor to make payments as soon as he starts school, or even right after graduation, because it will take time for his salary to rise, so we have to set low minimum payments. Similarly, a student loan works more like an open line of credit, because it may grow every semester. We don’t take out one flat amount for the four year bachelor’s degree or the three year law degree; we take out partial loans, as needed, each semester. It’s not analogous to either of the above models.
- It is therefore critical that the student understand that “making the payments on time” is absolutely nowhere near enough to settle his obligation anytime soon. This education is the responsibility of parents, friends, school, bank… everyone in the mix needs to do whatever is possible to ensure that the student understands the need to pay much, much more than the minimum, whenever he can.
It has become clear in watching the current debate that thousands of these debtors never understood their need to rigorously pay down their debt as fast as possible. Any proposed solution today must include a campaign to ensure that this message is hammered home in the future. Perhaps we need to borrow a page from the Surgeon General’s warning on cigarette packs: On every student loan payment coupon, we could print:
“Note: Even if you always pay this minimum amount timely, you and your family may still eventually be buried under mountains of debt. Try to pay double, triple, even quadruple payments whenever possible, in order to free yourself from this loan as fast as you can.”
How Did You Spend Your Student Years?
We would love to think that all student loans are spent the same way: on tuition, books, room and board, for a worthwhile degree. And many are. But many are not.
- Many students choose an overpriced college – or shall we say, overpriced for them – spending tens of thousands more for a degree that won’t do for them what they expected it to. They could take out fewer loans, and still get the same degree, by going to a cheaper college in their home state. If the student needs a loan to go to college, why not go to a cheaper college?
- Many students are careful about picking the college, but not about the rest of their costs. Did they pay extra to join a fraternity or sorority? Did they pay extra for an off-campus apartment, or could they have saved more by having roommates instead of a single? Did they take advantage of the best meal plan? Did they take advantage of used books, loaned books, or library books? These may seem like small potatoes next to the tuition, but taken together, these choices make a difference of many thousands of dollars per year. Making the best choices on books, room and board can save the equivalent of a year’s tuition, reducing that debt obligation significantly.
- How did the student spend his college career?
- Did the student focus on his studies, add a double major or a worthwhile minor or two, in order to ensure that the degree was worth as much as it could possibly be?
- Did the student go for internships or other part time jobs and research projects while in school, to get a head start on post-college employment, or did he coast through college, partying or enjoying extracurriculars, leaving him to be graduated as a complete novice to the work world, thinking that a degree will be enough to get a great job? With very rare exceptions, it won’t be.
How a person spends those college years is critical to his future economic status.
The more frugal you are in college, the less debt you need to saddle yourself with.
The more debt you take on, the more important it is to work hard and plan for being in the strongest position possible upon graduation.
How Did You Spend Your Early Adulthood?
Similarly, how you spend those first years out of college is critical to your ability to pay off your loans. Every penny you spend on a luxury is money you could have used to pay down your loan.
- Upon graduation, did these students move back home with their parents to save money, or at least share a cheap apartment with a couple of roommates… or did they insist on living on their own? A solitary apartment is a luxury that you can’t afford when you have student loans.
- If these students needed transportation, did they buy the cheapest dependable econobox they could find, or did they want a more luxurious ride? Every additional ten grand spent on a car is ten grand that could have gone to paying down that debt faster.
- Did they get one full time job and consider that enough, or did they take on one or even two part time jobs in addition, to pay off their bills?
Those who have had part time jobs can tell you that a part time job is worth much more than its salary: it keeps you busy so you can’t spend. If you work every evening or weekend, you can’t go out with friends every evening or weekend.
So, in addition to being paid forty or fifty dollars for that part time shift, you are saving the forty or fifty you would have spent by hitting the movies, the bars, or the pizza places with your buddies. Another hundred dollars like that, a couple times a week, and your student loan starts getting paid down much more quickly, doesn’t it?
The Economy and Relative Value
Among the most important elements of the process is somewhat out of the student’s hands: into what kind of economy does he or she graduate?
- If the country is in recession (like the present) when the student gets his degree, he’s less likely to be able to find a job that will support the rapid payment of bills. By contrast, if the student is graduated into a booming economy, like the Reagan ‘80s, there is a much better chance of being able to get those well-paying starting jobs, and move up quickly enough to make a dent in those loans.
- Where does the new graduate choose to live – a terribly expensive community like Manhattan or Chicago’s Lincoln Park, or the affordable suburbs of a smaller city, perhaps in middle America? Costs of living vary widely across the country, even from neighborhood to neighborhood in the same county. If you live as frugally as you can when starting out in your career – assuming safety of course – you have a better shot at paying down those loans quickly.
What is the cause of these challenges? Why are some areas so expensive, and why are some times so difficult? In almost every case – because of government choices. High taxes, high regulations, stimulus programs, bureaucratic overreach – these are the costly government policies that drive up the cost of living, drive down economic opportunities, and leave our college graduates (and everyone else) suffering a harsher personal economic status than they might enjoy in the Limited Government environment which our Founding Fathers intended for us.
Taxpayers
It is tempting to be cocky about this and simply say, “Your neighbor didn’t take out that loan; you did. So your neighbor shouldn’t be on the hook for your loan.”
And frankly, cocky as it sounds, it’s right. Especially when your neighbor paid for his own college, or for his own kids’ college, or made the hard choice to struggle along in his career without college himself.
The thing is, long before this current request to “forgive” ten or twenty grand per debtor came along, American taxpayers have already contributed – and continue to contribute – an immense amount to higher education. Consider what the taxpayer funds already:
- In every state, there are relatively inexpensive state colleges and universities that provide bachelors’ degrees and often advanced degrees at relatively low prices – usually $10K to $25K per year including room and board for in-state students. The taxpayers of every state provide the core funding for these “public” institutions, making them affordable.
- In every state – even the territories of Puerto Rico, American Samoa, Guam and Northern Marianas, there are community colleges and vocational schools that are much cheaper even than the state colleges. At these, students can either obtain Associates’ degrees in their own right (which, depending on the career, are sometimes just as good as a Bachelor’s), or get two years of credits that will transfer to a four year college. If done right, this almost halves the cost of a four year degree. The taxpayers of each state provide the funding for these “junior college” class campuses.
- In every state, a student can get partial or even full tuition paid by signing up to join either the national military or the state national guard. Students who choose these options are signing away a much shorter period of their post-graduation adulthood than those who take out huge loans, so many do choose these options happily. Taxpayers fund these programs.
- At both the state and federal level, there are programs ranging from state “merit scholars” to federal Pell grants, all sorts of merit-based, demographics-based, and need-based scholarships that are taxpayer-funded as well.
It is undeniable: the taxpayer already pays a mint for other people’s higher education. At some point, that well has to run dry.
The Real Cost in an Era of National Debt
We are asked today – well, frankly, we are not asked, we are ordered – to pay down the loans of those who still have loans today. The current proposal – at this writing – is reported as $10,000 per person earning under $125K/year, or per couple earning under $250K/year, double that if the person had Pell grants (no one has explained why a person who received even more federal dollars at the start should get even more today).
The estimated total works out to roughly $3000 per taxpayer in the United States, the majority of whom earn less than the recipients of this benevolence do.
The numbers shared, however, have not always been presented honestly. Consider:
- The cost of the offer on the table (which will happen, despite its illegality, if it’s not successfully stopped in the courts) is estimated to be about $300 billion.
- If the federal government were debt-free, running an annual surplus, like most states do, this number could be trusted: “We have money; we’re going to spend it to write off these debts. Done.”
- But the federal government is not debt-free; it has an insurmountable national debt. And it is not running a surplus; despite collecting record-breaking revenue every year, federal spending outpaces it, adding to the debt every year. As a result, to “forgive” these debts, the federal government will have to add immediately to that now-permanent national debt.
- This means that instead of taking in regular payments to pay down that mass, the federal government will have to add to the shared debt load, increasing the cost of servicing our national debt by that much more every year.
- As a result, we must view this alleged $300 billion as double, or triple, or quadruple that figure, depending on when we expect to, someday, eventually, pay off our national debt and return to federal solvency. When will that be?
We must therefore view this proposal as being, at minimum, a trillion dollar spending plan. At least. This proposal doesn’t really transfer a debt from one payer to another; it supersizes the debt in one fell swoop.
And so we must ask: What benefit does society get from that trillion dollars, to make it worth such a huge debt?
The Benefits of a Spending Plan
Governments are no strangers to stimulus plans. Spending money we don’t have is mother’s milk to the modern politician.
But the idea of a stimulus plan, especially during a recession, is that it creates a windfall for some current group while deferring the cost to the public at large, in the future. Real infrastructure spending, for example, employs roadbuilders and bridgebuilders.
“Forgiving” portions of these student loans doesn’t do that at all.
- Rather than creating new jobs for professors, T.A.s, and college administrators, these existing loans paid for those jobs years ago. It’s in the past. This spending bill won’t help them today.
- Similarly, rather than boosting the revenue stream to on-campus and off-campus housing, to campus cafeterias and neighborhood eateries, to campus bookstores and academic publishers, those expenditures too all occurred years and years in the past. Today’s spending bill won’t help any of them.
- In fact, the only people it helps are the former students themselves, and even then, only in numbers that many don’t appreciate, and even for those who do, often not enough to significantly or quickly change their standard of living. $10,000 off a $50,000 loan leaves them with a $40,000 loan; even after receiving this generous break, they’re not going to be in a position to shower their community with increased support of restaurants, theaters, and gift shops.
The benefit to the community’s economy will be far out, unnoticeable, and certainly anything but instantly stimulative, which would be the only justification for ever even considering such an idea at a time like this.
Education’s Contribution
As an industry, as such, the education community must bear some blame for the situation, but not as much as some would have us believe.
- Many colleges and universities are already inexpensive, so inexpensive, in fact, that one can obtain a bachelor’s for less than fifty thousand dollars. Not a fancy one with an impressive name, but still, a bachelor’s. While many colleges do charge many times that, the student doesn’t have to go to those. The business of higher education, therefore, provides enough inexpensive choices. It’s difficult justifying taxpayer funding of a luxury product, when an affordable basic product is available.
- Colleges differ widely in how much information they provide, and how hard they try, to communicate the financial burden to their students.
- At one extreme, Purdue has personal meetings with each student who participates in their Back-a-Boiler program, going so far as to require the student to repeat the terms back to them verbally before signing the agreement, so that a full understanding of the financial risk is absolutely certain.
- At the other extreme, many colleges never have a conversation with the students at all, trusting the students’ parents and friends to set them straight on the financial aspects of their college funding choices.
- High schools generally have guidance counselors whose role is to focus on college preparation, college admissions, and scholarship applications. The high schools rarely employ financial advisors to help educate parents and students about the many financial aspects of the college selection and funding choices. That’s really where it’s needed most – before the student even picks his college.
A Time for Reform
It is clear that reforms are desperately needed, but not the alleged reforms on the table.
- We need students to better understand the hole they may be digging for themselves. In advance. Before it’s too late.
- We need more students to be open to working first and saving before going to college.
- We need more students to be open to trade schools and other vocational programs – which are often employer-funded – instead of the expensive, traditional four year route.
- We need many colleges to better look after their own costs and rates.
- We need our high schools and parents to better prepare their children for potentially life-crushing financial choices. Before it’s too late.
- We need the federal government to get out of the higher education financial aid business altogether. It’s their grants and aid and loans that drive up most of these prices; everyone would be better off if they all disappeared overnight.
- And most of all, we need government to get out of the way of the private sector, and enable a booming economy that provides jobs for our graduates and enables them to put their degrees to work and build successful careers.
But what we don’t need is a costly vote-buying scheme that just piles another trillion dollars on top of the national debt, further crippling our economy and limiting the opportunities of generations to come.
Copyright 2022 John F Di Leo
John F. Di Leo is a Chicagoland-based trade compliance trainer and transportation manager, writer, and actor. A one-time county chairman of the Milwaukee County Republican Party, he has been writing regularly for Illinois Review since 2009.
A collection of John’s Illinois Review articles about vote fraud, The Tales of Little Pavel, and his 2021 political satires about current events, Evening Soup with Basement Joe, Volumes One and Two, are available, in either paperback or eBook, only on Amazon.
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