Death, Taxes, And Student Loans

by Anitra Pavlico

It does not take long for history to repeat itself. It was only a little over a decade ago that overzealous lending, lax underwriting standards, unrealistic collateral valuations, borrowers not understanding loan terms, an exploding derivative securities market–and a dozen or so other factors–led to a massive crash in the housing market. Today in the United States we have outstanding student loan debt of $1.5 trillion. Average debt per student is $37,000, and over 44 million Americans have student loan debt. Default rates are rising. The situation is unsustainable on a grand scale, and on a personal scale is causing millions of people untold stress. At the same time, the prospect of debt cancellation seems too good to be true.

There are some interesting parallels to the housing market of last decade and some key differences. (This is a non-economist’s view from someone who has worked on litigation arising from defective mortgage-backed securities.) One parallel is that demand has pushed the costs of college higher and higher, just as it did in the housing market–and another similarity is that easy credit has pushed costs higher. Financing creates a sort of reality gap between cost of the goods and ability to repay. If you have to save for school in advance, you will be keenly focused on rising costs of your end goal. If costs rise too quickly, you will never be able to save enough, and you won’t be able to go. If costs rise quickly but you will get financing for whatever part you can’t afford, you are not necessarily so focused on the ultimate cost. Whatever it is, you will be attending the school. Some observers have blamed the federal government for guaranteeing almost all student loan debt, thus making lending to students a very attractive proposition. It is painfully similar to the government’s magnanimous emphasis on expanding homeownership.

It is impossible to single anyone out in this blame game, but you will often see references to “greedy college administrators” as a cause of ballooning college costs that have far outpaced inflation. If students are going to get financing anyway, why not charge $30,000 a year instead of $20,000? (And build a new sports facility that might draw more students . . .) It was similarly easy for borrowers to buy a house in the run-up to the housing crash. They often did not even have to show proof of income or verify employment. It is not a coincidence that housing prices skyrocketed as the financing was going to be forthcoming regardless. 

We also shouldn’t overlook the fact that much of this student loan debt, like housing debt used to be, is being securitized–packaged and sold in bundles to investors. This arguably helps the loan industry balloon into a speculative bubble. But if students default in growing numbers, investment funds that bet on students’ infinite ability to toil and pay off their loans will lose out, and it will undoubtedly have an effect on the economy at large. The default rate is currently around 10 percent, but is forecast to increase. Jack Du writes for Investopedia that “whether this [securitization] industry can sustain itself will come down to whether enough borrowers can eventually pay their debt obligations, and that is looking like a slim prospect.” Unfortunately, it is not only the Jeffrey Epsteins of the world who invest in these securities, but also pension funds and local municipalities.

Another parallel to the housing crash is that the assets are overvalued at the outset. As hard as it is to appraise a house, it is much harder to assign a value to a college or postgraduate education. One sees statistics such as a 75% higher wage differential for college graduates, but it is difficult to draw general conclusions from this when there is surely a huge degree of variability depending on course of study, family connections, locality, and personal drive. Besides, we are constantly hearing that the job market of the future will look nothing like the job market of the past. Jobs are automated, outsourced, or otherwise disappearing. This does not jibe at all with skyrocketing college costs. Graduates may be lucky to get any job, never mind one that allows them to repay their huge debt. So what is a college degree actually worth? If “everyone” has a degree, the value of a degree to set yourself apart from competitors is arguably diminished.

With the housing bubble, one endemic issue was that appraisals were inflated. This presents a problem because in a perfect world, borrowers are typically unable to take out more of a loan than the collateral would cover should they default. If a house is actually worth $200,000 but the appraiser says it is worth $250,000, the borrower may be able to get a loan for $250,000. If he then defaults within a few months, he is stuck owing more than the house is worth. With a college education, though, there are no appraisals at all. One thing that could slow down runaway tuition costs would be if students and their co-borrowing parents demand more data on what they are paying for, and will be paying for, potentially decades after graduation. There could be a new industry for data miners–we all know the data exist–that rank colleges on job placement, salaries, and job satisfaction to a much greater degree than we see now. For that matter, as I unlucratively majored in history myself, and would like to believe that universities are not trade schools, graduates should be surveyed on those intangible benefits of education. Are graduates happier than they were before? Do they feel they have tools to cope with adulthood? Did they derive benefits from mingling with a diverse student population? Did they gain a sense of the world at large, their place in it, and how they can improve it? Not that that will pay the bills necessarily, but it may help students make a better-educated decision on where to attend and soften the blow of any additional debt, and it may reward schools that foster this type of environment.

Yet another parallel with the housing market was that loan officers have not adequately considered the borrower’s ability to repay the loan–a cardinal rule of lending. With student loans, the borrowers are 18, 19, 20 years old, usually with no work history, with no job lined up after school most of the time, in a rapidly changing job market. It is impossible to see how lenders realistically gauge ability to repay.

Some ways the student loan debt crisis differs from the housing debt crisis are that student loan debt is unsecured, and also that graduates cannot have student loan debt discharged in bankruptcy. The former means that banks cannot repossess or foreclose on a degree: you are stuck with the piece of paper regardless. The latter likewise means you are stuck with the piece of paper regardless. Credit card debt, auto loans, mortgage loans–these can be erased to varying degrees. Student loan debt is forever. It wasn’t always this way. Until 1976, bankruptcy protection existed for student loans. Activist Alan Collinge predicted a few years ago that this protection will eventually be restored and points out that one recent bill to restore bankruptcy protection had bipartisan support. As default rates inevitably rise, he says, “the entire lending system is going to quite literally evaporate into a mist of illegitimacy.” His organization’s website calls the current federal student loan system “the most ruthless, hyper-inflationary and predatory lending system that the nation has ever seen.” Senator Elizabeth Warren has accused the government of profiteering by charging more interest than it needs to in order to run the loan program, and putting profits toward funding the government generally. If the government won’t help student loan borrowers, and Sallie Mae and Navient obviously won’t help, then borrowers need to be strategic and safeguard their future financial–and mental–well-being.

One development that could reverse the trend of staggering, life-changing debt would be for employers to be more flexible on degree requirements for people they hire. Why can’t large corporations, trendsetter Google for example, increase their hiring of intelligent, capable young people out of high school, and provide on-the-job training to enable them to succeed? Or if not directly out of high school, then the corporate world should determine which general skills would be most useful, and then hire people who have taken a few intensive courses post-high school, such as writing, research, data analysis, or coding. (Sadly, many employers are under the impression, rightly or wrongly, that high school graduates can’t necessarily read or write well.) In some fields, such as engineering or medicine, employers could not do this, but there are not many jobs that people get right out of college that require more than a solid grounding in these basic areas. As long as you can write, understand what is written, and show up on time, you’re at least halfway to job success. I love literature, but I did not find that my having read The Faerie Queene in college was an essential precursor to entering the workplace. If students are able to take courses at a leisurely pace, and have decent jobs while they do so, they will not have to work soul-crushing hours at lucrative positions right after graduation, they can take more relaxed jobs that might pay less, and they will have more time to read Spenser on their own. It is incumbent on employers to dispel any bias against job applicants who are still working toward a four-year degree, possibly over eight years or more, while they work to pay their way. Otherwise students graduate with no reasonable ability to repay their massive debt in less than several decades. 

What is important in the workplace but not widely taught in college–except maybe as an obscure elective–is ethics. Not merely the ethics of whether you should cheat on your exam or not, but ethics in the ancient sense: how to develop character, how to find meaning, how to treat others. In the frenzy of college applications, SATs, and extracurriculars, and then at least four years of studying, exams, and stress over achieving grades good enough to get a high-paying job–there is little emphasis on how students can work as part of a team: how they can do a job efficiently so that others don’t have to pick up their slack; how to shift their focus from themselves, where it has been firmly placed for years, to a larger purpose. We should therefore add ethics to the short list of topics for intensive study in lieu of a required college degree before employment.

Employers should also recognize nontraditional forays into work such as freelancing, volunteerism, or entrepreneurial endeavors. We are squandering the talents and the idealism of our 20-somethings by insisting that they take on burdensome debt in order to “succeed” as an adult. We have a world full of problems and our college graduates are forced to solipsistically work excessive hours at uninteresting jobs, thus ensuring that their personal stress crowds out any thoughts of improving the world. We should instead reward attempts to think creatively of solutions to combat climate change, income inequality, racism, job displacement, and the host of other challenges we currently face. 

Finally, we should wipe out the $1.5 trillion in outstanding student loan debt and stop asking what’s wrong with millennials. The answer is clear.

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