Crippling Student Loan Debt Kills Economies
- Posted by Jeff Carter
- on April 24th, 2012
Student loan debt is massive and expanding. It’s a huge problem to future growth in the US. Why? Because when you are just starting out and you can’t afford to take risk on different jobs because you are worried bill collectors are breathing down your neck. Collectively, it forces people into safer choices.
Instapundit has been chronicling the student debt debacle for over a year now. The topic was one of the points of the Occupy movement. Forgiveness of student debt. Big debt limits choice. Kids out of college won’t be able to buy homes. If I were someone of that age, I’d like to see their personal finances before marrying them. Why marry someone with a massive debt to pay off? Marriage is risky enough.
I took out a student loan myself. The only reason I did it was at the time I was able to borrow from the government at 3%, and reinvest it in short term rates at 19%. It was a no brainer. I doubled my money. The government eliminated that loophole in the 1980’s. Smart move.
However, there doesn’t seem to be any economic marketplace around schools, debt and outcomes. College tuition and costs have skyrocketed over the last fifteen years. The reasons behind that are many. They can be summed up in a few thoughts. First, the demand for a college education rose world wide as barriers to entry fell. More foreign students are enrolled at US schools than ever before. Also, it’s been economically proven that people with a college education tend to do better financially than people without one. Second, we haven’t increased the supply of schools, so “price” has to rise with increased demand. Third, the federal government has subsidized the heck out of education, driving up prices even more.
Then there is the selection of college majors by students. Over the past fifteen years, we have had a generally good economy. Students didn’t make major choices that would teach them how to be productive. Instead, many of them gravitated to soft majors. Soft majors might make good debaters, but they don’t make good engineers and mathematicians. The future economy will be driven by engineers and scientists that can create. There is room for some critical thinkers that can sell, but I find many of the soft major kids don’t like that either. They congregate into jobs provided by NGO’s or government. That’s non productive.
The government subsidies, and the other forces have obscured real world market forces that would have driven different choices by students. Ironically, in a world where businesses can borrow for practically nothing, students are looking at borrowing at 6.8%. Only in government…..
We are rapidly reaching a breaking point. How efficient is it to borrow money to pay $50,000 plus per year for a degree in something like Women’s Studies, or other soft major? Where do we engage people with this skillset to accomplish something productive in the macro economy that brings us the next leap forward? Instead of training creators, we are creating critics. It seems to me that criticism is the only skill the soft major people have.
The Obama campaign will pull into perceived swing state North Carolina today to talk about student loans. No doubt, there will be more pandering as Obama tries to shore up his tattered base going into the election. He will probably say something about the Stafford Loan program. Interest rates will jump on them after June 30. Neither party wants to be perceived as hurting education prior to an election, so certainly something will be done.
Today’s Wall Street Journal had a nice article about the situation. What caught my eye were these paragraphs,
In response, many financial planners are advising parents to consider other options besides government-sponsored loans.
One option for parents with excellent credit, planners say, is securing a private loan with a variable rate. Those rates currently start at around 3%. With the Federal Reserve not expected to raise interest rates through at least 2014, parents can expect rates to remain low for the next two years, says Mark Kantrowitz, publisher of FinAid.org. This route is best for those who are confident they will be able to pay off student loans in the next couple of years, planners say, due to the risk that rates will start to rise and borrowers will be saddled with higher monthly payments.
Options for private loans, however, are shrinking. There are now 22 lenders providing private student loans, down from about 60 before the market crash of 2008, according to FinAid.org.
Obama has deliberately tried to derail the private loan market during his administration. In the Obamacare bill, there were provisions that talked about student loans! My personal opinion is the government ought to get out of the loan market altogether and make it a private market. That’s one of the reasons I made an investment into Alltuition. If the people wise up and go to private markets where money is cheaper, then Alltuition ought to benefit.
From kindergarten to secondary school, our government has screwed up the process. Back in the 1950’s our schools were considered the greatest in the world. But over time, as the federal government has stuck its finger in the pie, the upward trajectory of our educational system has declined. Our public schools are now second rate.
The quicker we get government out of the educational market, the better off our entire society will be.
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Jeffrey Carter is an angel investor and independent trader. He specializes in turning concepts into profits. He co-founded Hyde Park Angels one of the most active angel groups in the United States in April of 2007. He previously served on the Chicago Mercantile Exchange Board of Directors. He has done market commentary for (More...)