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Debt Forgiveness is Unforgiving

Debt Forgiveness is Unforgiving

| August 30, 2022

The student loan debt forgiveness put forth by the Biden administration has become a hot topic on the news and on social media. I’d like to offer a few bipartisan takeaways that apply to your own personal financial plan.

First of all, what we subsidize grows in price and shrinks in value. In the early 2000’s, the government decided that home ownership was a worthy goal. By order of the crown, lending standards were bent to over backwards to ”help” people buy their first home. Fannie Mae and Freddie Mac stood behind those NINJA loans (No income, No job, Just apply). The good faith and credit of the United States was implied to be backing those institutions. It happened slowly and then all at once.

Housing prices skyrocketed. Depending on your location, billionaires were made overnight. Stories were told of wealth and success. Real estate was a no-lose proposition and you were a fool if you weren’t financing multiple properties to flip or to rent long term. The price of homes grew until we realized that the value of those debt instruments had shrunk. As people began to default, the house of cards waivered. As regulators looked at the balance sheets and the complicated debt contortions therein, Wall Street had to be bailed out at the expense of Main Street.

The student loan situation is no different. Another government-backed organization, this time Sallie Mae, was used to “help” people better themselves through a college education. Like easy housing, easy degrees sounds like a leg up for hard working Americans who want to better themselves. But what we subsidize grows in price and shrinks in value. The only thing that can compete with tuition inflation is health care inflation. Both are subsidized through government subsidies.

However, while tuition has skyrocketed, the value of the degree has decreased. Partially, because everybody in your office has an online MBA. If supply is high, value is low. You are simply one of many masters-degree baristas. The other issue with value decrease is the functionality of these degrees. Too many degrees are philosophical navel gazing with no career path at the end of the education.

Unlike home loans, the student loan can be used for anything. Tuition, books, food, trips to Ibiza and a manicure. The non-purposed student loan is akin to a home equity line of credit. The problem is the collateral is the students future. If you don’t my accuracy ask your barista what degree they have and how much student loan they walked away with.

Second of all, what we subsidize grows in irresponsibility. Should there by three “Universities” within 10 miles of my office? The easy money student loan has created a market for education. Whereas, the housing crisis led to a Wall Street bailout, the tuition crisis led to a University bailout. The Wall street bailout didn’t help homeowners and the student loan debt cancellation won’t help students. The same zombified University marketplace is simply being given a shot of adrenaline. With this precedent set, Universities will price the debt cancellation into future prices and feel less compelled by competition. This should end poorly for all parties involved.

More banks should have been shuttered in the housing crisis. More universities should be shuttered today. Instead, both get bailed out and the working stiff pays all but $10,000 of someone else’s poor investment choices.

College is the riskiest investment you’ll ever make. Choose wisely and you have a worthwhile career. Choose poorly and it’s worse than worthless and the debt is shared. In the words of Thomas Sowell, “You cannot subsidize irresponsibility and expect people to become more responsible.”