Help, I made a decision, and it’s all your faultSubmitted by Sims Investment Management, LLC on March 8th, 2021
Help, I made a decision, and it’s all your fault
By: Cory Sims
An interesting argument has surfaced over the last year. It’s nothing new, however. This argument, this phenomenon for lack of a better term, has been brewing like a Jamaica “everything is Irie” premium-grain bean for some time. While we’re certainly not facing a dearth of arguments these days, the argument we’re referring to here is the argument for none other than forgiveness.
Forgiveness is empathic, forgiveness is righteous, and above all, forgiveness is innately human. Yet, social media and our collective ability to delve into the minutia of nearly anyone has proven absolutely fatal for the unlucky. Past behaviors and statements are coming back to bite. So while some are championing forgiveness for some things, others would rather key in on a random tweet to ensure your immediate and long-term future is utterly miserable. “To forgive is to forget,” they cry, “and we must never forget any transgressions (that in Roman times would be certain fodder for the guillotine).” In fact, the modern-day hang master would be the most highly paid public servant (not Dr. Fauci) if such a practice were in play today.
So while forgiving people who might have made an error in judgment or said something they regret is off the table, what’s the forgiveness we’re talking about? Well, that would be forgiving someone not for what they said or how they behaved, but rather the cognizant act of applying for a student loan and promising to pay it back. Egast, the horror!!
Merriam-Webster defines a loan as “money lent at interest,” or “something lent usually for the borrower’s temporary use.” In the case of a school loan ... drumroll, please … the same logic applies! You should have been tipped off by the word “loan” in the phrase “student loan.” The money lent is for the borrower to pay for their schooling, with an interest payment attached to the principal. The agreed-upon interest (and timeframe) is what the borrower pledges to pay back to the lender. But best yet, if said borrower defaults, we have a handy legal system that subsequently intervenes.
This is the prevailing logic on how money is lent, spent, invested, etc., in a functioning republic. Yet, student loans are big business, so big that the total outstanding debt is larger than credit card debt. In fact, the only household debt that eclipses school loans are mortgages.
US culture puts a premium on pursuing a college education. To be fair, research is in that someone with a bachelor’s degree on average earns $1 million more than a peer with a high school diploma. That’s a significant chunk of money, and a simple back-of-the-envelope calculation yields a clear conclusion - borrowing $40,000 to earn $1 million over the next 45 years is a nice return.
The problem, however, is the manner in which student loans are extended is radically different than say a car or home loan. When you take out a car or home loan, a bank or some private financial entity is the typical lender processing your application. Because they are a business, they assess your ability to repay the loan based on a series of factors. You are then assigned a risk evaluation score, a corresponding approved amount, the interest rate, and a repayment timeframe. The lender is taking a risk on you and has worked that risk into their offer. Lenders employ teams of professionals to analyze risk and make educated decisions. If they extended loans to everyone that entered their establishment without any background criteria, they’d be bankrupt within a year.
When we say the process of taking out a school loan is radically different than nearly every other loan, it’s because a bank is frequently not involved. In fact, private school loans make up a paltry 7.87% of the total pie in the US. The other 92.13% isn’t coming from your Uncle Larry or Elon Musk either. Nope, the lender is the other monster on the block with a ton of cash (your cash) - Uncle Sam.
Yes, 9 times out of 10, the government is the entity lending you money to pursue a higher education. Didn’t know Uncle Sam can walk, talk and squawk like a bank, did you? Well, he/her/they/them certainly can, and have, and a BIG reason why there are so many loan defaults and now cries for forgiveness is because … surprise, surprise … you already know where we’re going, don’t you … the government isn’t great at pretending to be a bank.
The government isn’t great at pretending to be many of the things they take on, but school loans have been an absolute disaster. During the 1980s and 2000s, eligibility criteria for loans were substantially liberalized. This naturally led to what economists refer to as a “supply glut.” Young folks took on debt, determined to study wherever they desired, thanks to the generous supply of student loan financing. Once educational entities caught on, for-profit schools began to pop like flies on …, err, a left-over hamburger.
At this point, little to no risk evaluation led Uncle Sam to extend loans to folks that were frankly not in a great position to repay them. Those same stringent risk management practices of banks were not (nor are) in play with federal loan issuing entities. If you had a passion for 16th-century Irish folk dance and were determined to be the world’s foremost scholar on the subject, $35,000 was there for the taking; go for it! Fast forward to said folk dance scholar’s graduation date, and low and behold, nobody gives a bleep in the marketplace.
Loan defaults naturally skyrocketed over this time. Roughly 85% of the increase in defaults from 1980 to 1990 was driven in large part by new, for-profit schools taking advantage of the supply glut and grabbing all the government cash they could. To Uncle Sam’s credit, they realized something was off and tightened the spigot soon after. But, the cycle ramped up once again in 1992, and the snowball has turned into a fast-moving avalanche.
As irresponsible as all this sounds, the most nefarious plot-line to this torrid affair is an entire industry, employing tens of thousands of people, is in place to spur that avalanche on. The government needs people to continue going to college due to the system they’ve created. Forget about an incentive to create more trade programs or alternatives to a four-year (or longer) degree. Uncle Sam isn’t in the trade program lending game. And when folks cry about the high tuition rates and why the cost of education rises so much faster than inflation, here’s a basic economic question - if you knew you could charge $8 instead of $4 for a cup of coffee because enough people would pay $8, what would you do?
An education might be worth $4, but the government is giving people $8. Universities know this and accordingly increase their tuition rates, commensurate with the government lending market. Rates will continue to rise, and because the government isn’t good at being a bank, more and more folks who should not be receiving loans will receive them, fall into default, and add fire to the forgiveness claims that student debt is immoral, wrong, and all should be forgiven.
The problem is clearly two-fold, but bailing out a bunch of folks who took on loans without a gun to their head is not the answer. Most college graduates come from middle-class families. When they fall into default, many seek the help of their families, and most receive it. This help can come from allowing a son or daughter to live with them again, assistance with basic necessities, etc. There are horror stories of single mothers living in cars due to onerous loan payments. The media sensationalize these stories for the reasons we already know. But these are far, far, FAR from the norm.
So this begs the question - how do we justify forgiving loans for people who statistically-speaking come from middle and upper-middle-class families? It also begs another, particularly uncomfortable question - why should taxpayers who chose not to go to college (yes, these people exist) be on the hook for bailing out those who took on a loan they cannot repay? This alone is egregious on multiple levels as many folks didn’t pursue college because they engaged in the cost-benefit analysis and concluded it wasn’t worth it. But they now need to help out Ricky up the block because his BA in Puppetry isn’t paying the bills?
To forgive a loan, the government needs to find that expected revenue elsewhere. They’ve built a gigantic apparatus that must be funded somehow. The “easy” answer, at least Uncle Sam, is to simply print more money. There are fancy terms for this, like “quantitative easing,” but the end result (inflation and price increases) typically hurts lower-class households. Following this logic, middle-class Mike can now move out of his parent’s house because he is free of his loan, but poor Peter needs to pay 11% more for meat as a result.
To forgive is indeed human. And we’d argue the world needs a whole lot more forgiveness when it comes to basic behavior. To err is also human, but to sit down, read a contract, take on a loan, pursue a major with a scant history of positive employability, and then turn around and demand your fellow taxpayer pay for your mistake is frankly, deplorable. But for some reason, this will likely be the first in a long series of posts on this issue we’re afraid.