Student Loan Fallacies—and Fixes
Student loan debt a national crisis I’m in debt $70.000 Student loan debt keeps growing! The last administration blamed greedy bankers taking big profits Unnecessary middle men in administering student loans. So government would take over student loans We take the middle man out! We take the banker out of the picture. Because they’re taking a profit. We’ll save American taxpayers 68 billion dollars But instead, the cost to taxpayers went up, and student debt increased 13 years ago the average new college graduate owed $20,000 in student loans. Today, that number has jumped to $37,000 What are you guys doing to help us with this student loan debt? Some politicians are still so eager to blame banks they don’t even know that they kicked banks out of the loan business Who would like to answer first? Uh we stopped making student loans in 2007 or so. Mr. Dimon? When the government took over student lending in 2010 or so we stopped doing all student lending If actual private lenders, people with skin in the game made college loans, they’d care about being paid back. They’d tell students which majors often lead to higher paying careers— and warn them that majoring in say sociology, art history or gender studies, might make it tougher to get out of debt. if I’m a young person going to college, the federal government doesn’t tell me that the amount that I’m borrowing is probably going to be unaffordable for me, because I’m on a path towards a low earning occupation. Beth Akers of the Manhattan Institute is the author of Game of Loans. Under the government program, no student has a reason even to think about, “Will I earn money?” That’s right We charge everyone the same interest rate, and we give them the same caps on how much they can borrow. Currently, many students are really dumb about their loans. 28% don’t even know they have a loan? It’s not because they’re dumb, it’s because we’ve made a system that’s really complex. Enough is enough, pay us back! Today, activists say, just make college free Forgive all the loans. It ends up giving very large benefits to people who probably don’t need it. It would be welfare for the rich. It sure would. A better solution, says Akers, is something called an ISA: an Income Share Agreement So you want to be a web developer? Sign up, pay nothing up front. That’s right, nothing. Some private computer-education boot camps do that. That gets them into a career, most often in coding. Those people were getting jobs. Yeah. The ISA was a way for the school to say to them, “You’re only going to pay us, if we help you succeed.” Now some colleges offer ISA’s. Graduates who get jobs repay the loans by paying the college a percentage of their income in the past five years, people are starting to get excited, and try to implement income share agreements. At first, I had no idea how I was going to move forward and pay for my education. Engineering student Paul Laurora was thrilled to learn that Purdue would help him get an ISA loan. So was Andrew Hoyler, who’s just started working as a pilot. [Plane sounds] Now that he has a job, he must pay the university 8% of his income for 104 months. So after that 104-month term ends, if you still have money that you owe, it’s forgiven, it’s forgotten, you don’t own another penny. Now, if I find myself in a six figure job tomorrow, there’s a chance that I’ll pay back far more than I initially took out. But you’re okay with that? I’m okay with that. The security of knowing that I’ll never pay back more than I can afford every month was enough for me. If it’s so good for you, I’d think it would be bad for the investor? It’s a risk that they take. Just like an investment It conveys information to the student, about how lucrative a different major’s going to be English majors must pay 4 1/2% of their income for 116 months Math majors pay 4% for just 96 months Some people think that’s unfair, but really that’s just a way that they can recapture the amount of money, that they’ve put up in the first place. This is new, useful information about what professions pay. Not only what they pay, but how stable it may be, what the future is like, It may even sway students away from going into majors that don’t have job prospects post-graduation. The English major has to pay 116 months. Your loan is over 30 months sooner! It’s definitely something to look forward to, that I can stop paying people quicker. We should think about investing in students the same way that we invest in startups. Share equity in their company. Basically, put the students in touch with rich people. It may be that there are rich investors feeding money into that funds. But it’s not an individual connection, between students and investors. We don’t know who the investor is, but I’d love to give him a hug or buy him a beer or something. The institutions are saying, “Hey, if I’m operating as the middleman, in a sense, I can make sure that no one’s taking advantage of my students. Still, some call ISA’S “predatory.” This is like indentured servitude. You’re locked into paying for all these months. If you’re graduating and you don’t have a job, you’re not paying anything. So where’s the servitude in that? It’s a brand new industry. The public’s still learning, the investors are still learning. They really care about the students It is a win-win situation for everyone involved in it.