The oncoming student debt crisis.

Lately, there has been a lot of noise on the internet regarding student debt. In a recent post on Forbes magazine's website, there are more than 44 million borrowers who collectively owe $1.5 trillion in student loan debt in the U.S. alone. Student loan debt is now the second highest consumer debt category - behind only mortgage debt - and higher than both credit cards and auto loans. Borrowers in the Class of 2017, on average, owe $28,650, according to the Institute for College Access and Success.  Given that too many people have borrowed too much money that they can't afford to pay back, it got me thinking about student loans, the debt that these students owe, and how to deal with this mountain of debt.

As I see it, the problem with student loan debt is:

1. It was guaranteed by the government.
2. It could not be discharged in bankruptcy.
3. It was issued without regard to whether a borrower's education would result in a job that could pay off the loan. 
4. It was a demand side education subsidy, and not a supply side subsidy. 
5. It was a major commitment made by people usually too young to understand the nature of that commitment.

Contrast issues #1, #2 & #3 with car loans and mortgages. These loans are secured by property, they can be discharged in bankruptcy, and the person's ability to pay is factored into whether the loan is issued or not. Given that the price of an education is in the same league as both a car loan and mortgage, shouldn't similar lender and borrower protections and privileges be in place? Why should the government be guaranteeing the loan and not allowing it to be discharged in bankruptcy?

Economics 101 says that if you want prices to go up, increase demand by throwing money at the consumption side of the equation. By making more money available for education without expanding the supply of "top tier" schools, students will either pay more for the same education, or buy an education of dubious quality. This is evidenced by the inflation of prices charged by good schools for an education, and the proliferation of scam, for-profit schools providing poor quality education to people who couldn't qualify to get into the good schools.

Lastly, with issue #5, we expect young adults, who are barely 18 at the time, to make the most important economic decision of their lives without much of a safety net (see issue #2 & #3). We keep the same student from buying a drink in the USA until s/he is 21. And having one underage drink is less of a life changing decision than choosing a school and borrowing the money to pay for the education.

I suggest to fix this problem, we need to do the following:

1. Eliminate government student loan guarantees.
2. Allow all student loan debts to be discharged in bankruptcy. 
3. Require that all lenders perform an analysis of whether the student's school and field of study will result in a job which allows the student to comfortably pay off the loan. They will be the risk holders, so the banks should have the right to determine who gets their loans.
4. Government subsidies to education should only be towards the expansion of the school system and for the development of new, highly qualified teachers for that system.
5. Require young adults to work for 2-3 years before applying for a student loan. These loans should not be issued to people under 21 years old.
6. Minimum standards for all schools must be set by a non-profit entity, and no student loans be issued to institutions not meeting this criteria. Graduation rates and Job Placement rates must be set high enough, so that scam, for-profit schools can not make money off of student loans.

This is a start for a longer thought experiment. But it applies real world, market principles to fix the system. However, it doesn't address what is needed for the students who have been victimized by the present dysfunctional system. For them, immediately addressing issues #1 and #2 should move things forward towards a market based system of funding higher education.

But how do we chip away at this mountain of debt incurred prior to making the above fixes without giving students a "free ride?"  Just letting existing borrowers go into bankruptcy to clear this mountain of debt can have unintended consequences.  I propose the following changes:

1. Student loan debt incurred prior to the enaction of these changes will be converted into inflation indexed, interest free loans. 
2. These loans will be paid by a separate income tax whose rate mirrors the current employee social security contribution (currently 7.5% of income), but with no upper income cap.
3. These loans will have a life span of no longer than 25 years.  If they are not paid off in full, the Federal government absorbs all losses.
4. A special inheritance tax of 10% will be imposed on all estates where the restructured loans have not been repaid out of former student incomes.  Appropriate legislation may be added to deal with legatee hardship, such as medical bills.

I have not defined all the issues needed to resolve the problems caused by our current student loan crisis.  However, this is a start - which is more than the legislative and executive branches of the Federal government have done lately....

The fear of markets, and the disciplines they enforce.

It's hard to believe that the New York Stock Exchange once looked like this.  The stock market was less regulated then, but never a place for a timid person to risk his/her money.

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One of the things I've said for years is that I believe in open, fair, and transparent markets. In an ideal world, these markets would be self regulating. However, powerful players love to distort markets via the use of rules, and via a lack of transparency.  In the case of the stock market, most disputes are settled via arbitration - which is often rigged in favor of the large firm by the nature of familiarity.  Precedents from one settlement are not applicable in the next case, so the large firms have an edge which is almost impossible overcome.

However, the lack of transparency affects more markets, and has an even greater effect. For example, the current practice of "Non-Standard" sizing makes it much harder for a person to "compare apples to apples" when determining the price of goods. In the case of a carton of Orange Juice, the standard 64 oz. size was shrunk by all players to 59.5 oz. - making it much harder for people to determine what the real price was.  Also, the shrunken size went less far, so the customer had to buy more containers to sate their needs for Orange Juice.  Something similar happened in the size of Tuna cans - a few years ago, the standard size was 6 oz. - now it's 5 oz.!  No one asked the consumer (in these terms) whether we wanted to pay the same money for smaller size packages, or more money for the same size packages.  If they did, the marketplace would have chastised the sellers of these goods - something they avoided by obfuscating their price hikes with package size changes.

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Right now, people are starting to see a crisis with student loans.  This is another example of marketplace interference creating disastrous effects.  A little over 150 years ago, it was "easy" for a person to attend some of the nation's most prestigious universities.  All they had to do was learn the "basics" - which included Latin, and other skills no longer needed in the real world - and then pay the bills for school - which weren't that expensive.  However, after World War 2, the GI Bill made it easier for students to afford college - and a college education was seen as the ticket to middle class success.  Years later, our nation's policies changed to provide poor people with grants to go to college, trying to create a more diverse student base in these schools. And then came the age of college loans - which I see as a total disaster.  Instead of increasing the supply of college seats (which would have reduced prices and increased availability), policy simply increased demand for college seats by making student loans cheap, easy to get, and with no demand that a student comes out with a salable skill.  The only effect here was to raise the price for seats in a good school.

What happened to the students?  Many got saddled by debt, studying in majors that would not prepare them for jobs in the outside world.  When a student owes money on a student loan, it is almost impossible for it to be discharged in bankruptcy.  As a result, the interest on the debt makes the student loan virtually impossible to pay off.  

But what would happen if we eliminated the Federal guarantee of payment?  What if these loans could be discharged in bankruptcy?  Well, many of the private lenders would cease lending money, marginal students would stop going to college, and colleges might be forced to lower their prices for study.  The powers that be don't want that.  The banks making a lot of these student loans would cease making loans - and making guaranteed profits.

I posed a question to a couple of people and got the same negative response - therefore I know I'm on to something....  What if (1) there were no guarantees of student loan repayment by any level of government, and (2) a student loan lender could insist that a student loan borrower major in a field likely to result in a job?  Both people said that this would be wrong - the student has a right to study what he/she wants to study.  But at whose expense?  The student is usually way too immature to make many decisions which will impact the rest of his/her life. Part of college's function in society should be more than that of a trade school - it should teach a person how to think, and how to look at life with a long term perspective.  One of these people said that if he were to take out a bank loan for a car, that the bank has no right to tell him what car to buy.  Yet, one could counter - that if a car manufacturer's finance arm offers you the loan on the car, it should have the right to tie you into buying one of their cars.

In short, the lack of a efficient market (with rules for proper debt discharging) for funding higher education has caused a crisis in higher education that also affects non-students. If a former student is saddled with too much student debt, that same person may not be able to afford getting married and having children. And if this person has children, he/she may not be able to pay enough in school taxes to educate the children - a long term risk for society.

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Not all problems in society can be resolved by market forces.  Other methods must be used to limit consumption of resources.  Great Britain spends about 35% of what America does on health care, and has a roughly equivalent standard of national health.  Canada spends about 50% of what America spends.  And other developed nations are in the same league. What is different?  They all recognize that health care doesn't work with a marketplace model. So, instead, they ration care in ways that Americans would consider unacceptable. Britain uses results based medicine, and when in doubt, chooses the cheapest alternative. There is a waiting line for almost everything except acute emergency care - and even then, there are rules and regulations that apply - as if one were part of a giant HMO.

I do not advocate the British or Canadian models, because they err in ways Americans would not accept.  But the German and French models have a lot to offer - if only we would examine them more closely.

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Americans like the idea of free express roads that take them from town to town, and city to city.  There is one big problem - the price - FREE.  This has encouraged the growth of the trucking industry over that of the railroads who pay for the upkeep of their track.  One might say that truckers pay gas taxes that should maintain the roads. But in many states, especially in the South, these gas taxes have not been raised in years, nor have they been indexed to inflation.  As a result, we're seeing part of our transportation infrastructure neglected by lack of proper funding, and now at great risk - as many structures are at the end of their life spans.

What happens when people have to pay to use a road?  People actually think - do they need to make this trip?  And this is an important question, as it reflects a market helping to shape a behavior. There is a discipline that takes place in a well functioning market.  The trick is to design a market well, regulate that market well (but minimally), and make sure that only the right things are governed by that market.... This, as I see it, is the big challenge of the 21st century.