Another Aspect of Student Loan Forgiveness
In recent weeks, several Signal columns and letters have discussed the pros and cons of forgiving student loans. The most salient argument against forgiveness is that it is not fair to those who borrowed money and paid their loans off, or for that matter, to people who decided to forgo college because of financial concerns. That argument resonates with many (including me) because it seems as though people whose loans are forgiven are rewarded for not meeting their debt obligations. We all end up paying for that because lenders ultimately pass their bad debt costs onto their customer base. Rewarding bad behavior generally does not make sense.
Fifty years ago, I borrowed $500 to help fund my college education and I fully repaid it within three years of graduating. I was able to work while in school, which covered a large part of my college costs. The amount I borrowed was reasonable in relation to my post-graduate income. Back in the 1970s, that was true for most students.
One big difference between now and then is that student loans back then were nonrecourse. If a borrower defaulted and failed to repay the loan, the lender (usually a bank) had no recourse other than to downgrade the borrower’s credit scores for a few years. Indeed, I know many baby boomers who never repaid their student loans, even though they were fully capable of doing so.
In response, Congress made subsequent loans recourse; if a borrower did not repay the loans, the lender could pursue collection remedies. This encouraged additional lenders to enter the market, which, in turn, facilitated a greater demand for college education.
When my daughter attended my alma mater less than 30 years after I graduated, tuition and other school costs were approximately 10 times what I paid. Increases of college costs over those 30 years vastly outpaced both the overall inflation rate and wage growth.
Consequently, student debt became increasingly harder to repay. Before I retired, many new hires at my company had six figures of student loans when they began their careers. Those were the lucky ones because many other students were unable to obtain the employment they anticipated when attending college — particularly if they graduated during the Great Recession.
The unlucky ones, who disproportionately came from lower-income households, are saddled with debt that will take a lifetime to repay. In retrospect, perhaps they made bad decisions, but they were encouraged by a vast network of influencers.
Numerous high school students were told by counselors and others that a college education will improve their lot economically. Many in low-income neighborhoods saw getting a debt-financed college education as their way out of poverty.
For a large proportion of students, the decision to take on enormous debt obligations was made when they were still teenagers.
Our schools do a poor job of teaching financial acumen. Not surprisingly, those students made uninformed decisions based in large part on advice from those whom they trusted.
All of this was good business for colleges and universities who could expand.
Many proprietary trade technical institutions made vast promises about job opportunities that simply could not be kept. In effect, institutions prospered with little oversight or regulation.
Who was caught holding the bag for this? Unfortunately, the answer is students who made decisions having lifetime consequences before they had the maturity to choose wisely.
Now let’s return to the premise that people who have their student loans forgiven are getting away with an unfair advantage.
Clearly there are many in that category who either had sufficient financial acumen when they took out the student loans, or they have the ability to repay them and are crying wolf.
It is hard to have sympathy for those folks.
But what about the people who lacked the maturity to make wise decisions and relied on the advice of trusted people? Clearly they were exploited.
Should they be condemned to a lifetime of economic hardship because of a decision they made before they were ready?
We need to look at ways to identify and help these people. Perhaps instead of taxpayers bailing them out, universities can use some of their endowment funds to ease the pain of alumni who were essentially exploited.
This will not be easy and will likely be controversial. Identifying those who were exploited will be the greatest challenge.
How do you equitably identify those folks?
Then how do you get the colleges to free up their endowments?
What about students who attended colleges with no significant endowment?
In the coming decade, baby boomers will be handing the political reins to the younger generations who are struggling with the consequences of massive student debt. The politicians from those generations will undoubtedly be more sympathetic to the plight of those saddled with unreasonably high levels of student debt.