The student loan crisis ...

If you want to know what’s really behind the student debt crisis, it’s simple.

Too much money has been loaned to people who won’t ever be able to pay it back.

If that sounds familiar it should:  it’s the subprime lending fiasco all over again.

Remember?

Politicians wanted to increase homeownership among people who couldn’t qualify for a regular mortgage.  People with bad credit or no credit.  People with few if any assets to use as collateral.  People whose current income was too low to afford the payments. 

In short, people who couldn’t prove they could afford a mortgage loan. 

So politicians forced banks and mortgage lenders to lower the bar. Just like that, almost anybody could get a mortgage. For almost any amount.  Even applicants banks would have turned down flat a short time earlier.  Whether they could make the payments was another matter. 

With so much easy money flooding the market, housing prices soared.  People bought houses well beyond their means.  When they couldn’t make the mortgage payments, which was predictable, they simply walked away and let banks foreclose. 

Banks were left holding trillions in bad debt they couldn’t recoup, which led to the collapse of the financial industry. That led to a recession. That led to the collapse of the domestic auto industry. All of which led to the rest of us – those of us who lived within our means, saved, and paid our bills – losing huge chunks of our 401(k)s, sometimes our jobs, and essentially footing the bill for what could easily have been prevented. 

Just by not loaning those borrowers more than they could pay back in the first place. 

By any reasonable measure, those people should have never qualified for the loans they got. That’s why banks didn’t want to touch them. 

Then politicians stepped in and forced the lenders.

Fast forward to today.

Politicians decided more people should go to college. But people needed money to go to college.  So government got into college loans, making it ridiculously easy for practically anyone to get a college loan, in almost any amount. 

With so much money flooding the college market, college tuition soared.  That meant students needed to borrow even more – but hey, going to college guaranteed good jobs, right?  No need to worry whether the borrowers would earn enough to pay off their loans.  It was more an “investment” than taking on debt.  It would all work out in the end. 

Too many students decided to use their student loans to simply “follow their passion” in college, without regard to where that would lead.  That might be okay if your parents are so rich you never have to worry about supporting yourself after college anyway. 

But for everyone else “just follow your passion” is perhaps the dumbest, most ill-conceived advice ever given to someone starting college. Especially when following your passion – instead of getting a degree in something with market value – often came with a price tag of $50K to $100K. 

Your passion may have been Ancient Mesopotamian Philosophy, Cult of Mithras Pottery, or something else equally obscure. But unless you become the world’s authority and get a prestigious gig from some big university teaching enough people also interested in those topics, there’s virtually no chance you’ll make a comfortable living from these right away. Perhaps ever. 

Much less pay off a $100K debt in your first 10 years out of school.

Dumb political decisions – as with the subprime lending meltdown – have left us with trillions of student debt whose borrowers are unable, or simply unwilling, to pay back. They can’t find jobs in their chosen field – which isn’t a surprise to everyone else but them.  The jobs they can get don’t pay enough to even start making loan payments – again not a surprise to anyone but them. 

However, this time it’s not the banks holding bad debt. It’s Uncle Sam. For the slow learners in the back row, that’s you and me. We’re collectively holding the bag.  

And that’s because our politicians decided a while back that banks were making too much money on college loans. Plus, were too picky about who qualified and for how much.  Politicians wanted more people to have access to college.  What better way than have government help? 

Great job, government. Thanks for saddling us with trillions in bad debt.    

Democrats on the left have a solution: just let those deadbeats walk away. Elizabeth Warren wants to give blanket forgiveness for up to $50K in student loans for each debtor in default; that would only cost us $640 billion, according to her.

Then she wants to make all public colleges and universities tuition free. No tuition, no future debt, I suppose she’s thinking. 

I have a better idea.  Or, I should say, ideas. 

First, make the debtors pay up. I paid back my college loans. So did millions of others. If they refuse to pay, offer them an alternative: Four years of military service for every $15k of outstanding debt; call it the DB Bill (like the GI Bill, but for deadbeats). Or: Five years of WPA-like work (at prevailing wages) building roads and bridges for every $15K of outstanding debt.

Everybody wins. 

Next, to head off future defaults, make colleges and universities place warning labels on all their courses, and especially on Majors.  Make them disclose that if a student chooses to major in French Poetry of the Middle Ages, for example, there are practically no jobs in their field for them when they graduate; in fact, graduates with that major typically work at convenience stores on night shift for a little more than minimum wage, or as waiters if they’re lucky. Tell the truth.   

Finally, get the government and politicians out of student loans altogether.  They’ve really screwed this up, as usual. Let regular FDIC-member banks handle student loans going forward.

And end government guarantees for student loans – banks will do a better job weeding out future deadbeats if they are on the hook for bad student loan decisions.

Let banks make money in return. It’s only fair.