Normally, we think debtors should be required to pay their obligations in full. I was once in that camp. But during the Financial Meltdown, we had a similar crisis, with too many people owing too much money on their homes. Amnesty – perhaps in form of something like a 25% forgiveness of everyone’s mortgages – would probably have cost less than the estimated $12.8 trillion spent on bailing out banks and other assorted lenders. So do we need student loan debt amnesty to avoid a similar crisis today?
It’s a valid question. At the time, it may have cost the government about $5 trillion to write down everyone’s mortgages by 25%. Instead, they spent 2 1/2 times as much bailing out the lenders. In a cruel irony, the banks – which had been shown public mercy by being bailed out – didn’t extend that courtesy to homeowners. Instead, they foreclosed on millions, precipitating a near depression.
There’s a saying in lending, If you owe me $1,000, you’re in trouble. But if you owe me $100,000, I’m in trouble.
So it was during the financial meltdown. But I think we may be heading in the same direction with student loan debt. Whoever is at fault – students, their parents, the colleges, the lenders, or the government – it will soon be everyone’s problem.
That’s why it’s time to consider student loan debt amnesty. It may not be the perfect solution, or even a fair one, but it’s increasingly a necessary one.
The Magnitude of the Problem
Let’s start out with a few statistics…
The cost of a college education. The following statistics are from The College Board, and are based on the 2017-2018 school year and include tuition, fees, room and board:
- Public colleges (in state), $20,770 per year, or just over $83,000 for 4 years.
- Public colleges (out-of-state), $36,420 per year, or more than $145,000 for 4 years.
- Private non-profit colleges, $46,950 per year, or nearly $188,000 for 4 years.
The median household income. Last month, the Census Bureau reported the median US household income was $61,372 for 2017. Since it’s a median figure, half of households earned more, and half earned less.
Now when you compare the cost of a college education with the median household income, there’s a clear disconnect. The average household, which is to say most households, don’t have nearly the income to cover the cost of higher education. And that’s to say nothing of families with two or three children to put through school.
The disconnect is increasingly being covered by student loan debt. The parents have neither the financial assets, nor the borrowing power to pay it all.
The natural outcome of this disconnect is a steady rise in student loan debt. That includes both the cumulative total nationally, and the average amount owed per student.
Last spring, an article on MarketWatch reported that student loan debt reached $1.52 Trillion, an average of more than $37,000 per graduate. Now again, it’s a median number, so half of graduates owe more, and some owe considerably more. It’s also up 50% from the $1 billion figure reached in 2012.
Clearly, the student loan debt problem is getting steadily worse.
The Economic Fallout of the Student Loan Debt Crisis
Everyone who’s ever been in debt understands the burden it creates. The Bible states the case clearly in Proverbs 22:7: The rich rule over the poor, and the borrower is slave to the lender. Debt is tough enough to manage when you’re an adult, and you’ve been around a while. But the burden is magnified when you’re young, and just coming out of the starting gate.
The purpose of a college education should be to better enable a graduate to compete in the economy. But student loan debt has the complete opposite effect. Even if the graduate is better able to compete for a job, he or she is stuck with the albatross of an often massive debt.
This hurts the graduate – and by extension the entire economy – in several ways.
- Fewer grads establishing their own households.
- Lower marriage and birth rates.
- Inability to make major purchase young adults normally do, like cars and houses.
Each of these outcomes hurts the economy, as well as the individuals directly affected. But I also believe there are other outcomes that made be even more significant, even if they’re subtle.
The Subtle Outcomes that Can’t be Measured by Statistics
For example, a young adult burdened by a large student debt may feel trapped in a job. He may feel such a strong need for the paycheck, that he become subdued, and even submissive.
I also believe a young person burdened by large debts is handcuffed in the job search. She may be so overwhelmed by her debt obligation, that she gives off a distinct air of desperation in job interviews.
Employers can sniff desperation, and that will result in one of two outcomes:
- The applicant is turned down for the job.
- She’s given a low-ball offer.
The low salary offer, which may also extend to a lower position, happens because the employer senses the applicant’s weak position. The employer’s strategy is reinforced when the applicant accepts the job at low pay. It then sets the stage for the employer to continue the process going forward with other applicants.
But there’s also a long-term consequence for the job applicant who accepts the low pay and position. The lower you start in the pecking order, the more difficult it is over the rest of your career.
Put another way, someone who starts at a lower station in the organizational hierarchy, is far less likely to be viewed as a fast track candidate in the future. It’s unfortunate, but a low start tends to follow you throughout your career.
This is a waste of potential.
Our Culture Encourages Debt
It’s tempting for us all the blame the graduate for his or her student debt problem. And to be sure, both the student and his or her family do deserve a large share of the blame. But they’re not alone.
Our entire economy, and even our culture, encourages debt. The marketing culture squarely emphasizes consumption. The pesky affordability problem is dealt with through easy financing arrangements. Whether it’s a brand new car, a house, a college education, or even an exotic vacation, there’s always a low cost financing package to grease the wheels of the sale.
That problem is inherent in our society, to the degree that it’s accepted without question. How else can we explain a nation that accepts a national debt of more than $21 trillion, while considering itself the richest nation on earth?
Yes, students and their families are to blame for student loan debt crisis. But the entire country has a hand in it.
The Education Industry in Particular Encourages Debt
The education industry deserves a special place of blame. And yes, education is exactly that – an industry. Like every other industry, it exists to survive, increase revenues, and pay its employees – particularly those at the top of the managerial chain.
Student loan debt has been encouraged by the education establishment since it began to realize the average household could no longer afford to send their children to college. The education establishment has tremendous influence with the political establishment. Getting the government to guarantee student loans for students with no means of support on their own, was the beginning of what has become a clear bubble.
The student loan debt bubble works the same way the housing and healthcare bubbles work. In the case of housing, lax credit guidelines and artificially low interest rates enable more people to buy homes. I saw this when I was in the mortgage industry, prior to the mortgage meltdown. People who could barely afford rent were being approved for six figure mortgages on borderline credit, insufficient income, and no money for the down payment.
It led to an unsustainable increase in house prices, that led to a real estate crash.
Healthcare is much the same. The entire industry is raising costs relentlessly, financed by health insurance, at least one-third of which comes from the government in the form of Medicare and Medicaid. The end result is both unaffordable health care costs and health insurance premiums. It hasn’t crashed yet, but my guess is we’re not to far from it.
All three are in clear bubble formation, housing, healthcare and education. And all for pretty much the same reason. Unrestrained lending leads to price explosions, that eventually overwhelms the affordability granted by the financing.
How Far Will we let This Crisis Go Before Action is Taken?
In 2018, student loan debt surpassed the $1.5 trillion mark. If things continue as they have for the past few decades, we’ll easily sail past the $2 trillion mark, probably in no more than 2 or 3 years. Next, we’ll go to $3 trillion, and soon enough to $5 trillion.
We can continue issuing debt to pay for rising college costs – which has become the American way in virtually every corner of the economy. But sooner or later, we’re going to reach the point of no return. And when we do, whether you’re a deeply indebted recent graduate, a person with no student debt at all, or even a retiree, you’re going to pay for this.
It may be in the form of higher taxes, higher interest rates, higher inflation, a weaker economy, or fewer job prospects. Or it might appear as the unkindest personal financial cut of all, a decline in the value of your house or your investment or retirement portfolio.
That’s usually when a crisis is finally acknowledged to be a crisis. But it’s also when it’s too late to act in a way that will prevent the crisis from getting really bad.
That’s why I think we need student loan debt amnesty. There’s a crisis brewing out there in the future, and we have a chance to do something about it now. The least painful solution maybe to simply reduce the amount of indebtedness per debtor, then cap the amount of money that can be borrowed for an education going forward.
What are your thoughts on this topic? Do you think we need student loan debt amnesty? What do you think will be the consequences if we do it? And what do you think the consequences will be if we don’t?