Things have changed since I entered college in the fall of 1951. Tuition at the University of Michigan in Ann Arbor was $75 per semester. That amount was quickly raised to $90. Today $90 wouldn’t cover the tuition cost of one hour of class time in a California University. There were no student loans available back then. Parents could borrow money for a child’s “higher” education, but no one would lend money to an unemployed student.
This week Time Magazine in comparing the school years 2008-2009 to 1999-2000, reported that “The average student debt for four year bachelor’s degrees steadily rose from $16,928 to $24,000 with more students applying for financial aid.” Today, Item 5 in the San Francisco Chronicle’s column, NATION about student debt, informed readers that: “The average student debt for bachelor’s degrees mushroomed 50% from 1996 to 2008…Over the same time frame, debt for associate degree graduates grew to twice the amount of their 1996 counterparts.”
Does it surprise anyone that the cost of a college education has increased significantly when that increase is so easily financed by government subsidized loans? The University of California increased tuition 32% last year and is seeking another 8% this year. During the years after graduation most recent grads are only paying interest on their student loans. In neither of those short media blurbs was there a reason given for the increase in size of student loans or a comment about how many of those loans were considered seriously past due!
I was head of finance for four of Chrysler’s overseas operations and their outboard corporation in the U.S. and Canada. A major “for profit” U.S. company didn’t finance their expensive products through dealers without expecting full payment when the vehicle was sold to the public. A government financing entity is not “for profit” but for helping citizens obtain abundant cheap loans. Their orientation is to replace private financing with public financing when the private banking sector refuses to loan money for activities that are not profitable.
Recently, the federal government introduced a new wrinkle to the student loan program. This innovation forgives the unpaid balance of a student loan to anyone who works for the government at least 10 years. Such a program doesn’t induce a debtor to honor his financial obligations. Who does pay for the unpaid principle? You guessed her, Chester, those of us who pay federal income taxes.
Motivating young men and women to obtain a higher education is an admirable goal. But this financing practice doesn’t teach college students their responsibilities to the society that helps them get ahead. Why pay off a loan if you don’t have the money? Are there any penalties for late payments? Is there pressure to collect because a loan can’t be written off in a bankruptcy? Is there any expectation that leniency is a sound way to finance what we used to call “dead beats?”
The policy of the federal government to promote higher education in a competitive world is not a bad idea if competing countries are sending their better students here for an education and subsidizing the cost of that education. The questionable behavior in our system is being lenient and not forcing debtors to work out an agreement about how they are going to repay their loans. There are no debtor prisons, and no collection agencies that threaten collection of the outstanding student loans.
The amount of student loans overdue is part of the reason the federal government is borrowing from China and other countries to finance the federal deficits accruing each year. We are just borrowing from Chang to finance Paul’s expensive higher education. Thank you, foreign creditors, for your generosity and understanding of our growing need to help poor youngsters attend college in the U.S. Send your studious youngsters to study in our universities, but remember, tuition costs are higher for out-of-state students!
Can this largesse be reversed? No, student loans are entitlements which never can be taken away from deserving citizens. At least not until creditor nations refuse to accept U.S. obligations. The administration of a government program such as student loans can never send worthy citizens to the poor house. Banks can repossess your home and finance companies your car, but how do you get “blood from a stone” if someone has no funds to pay down his or her loan. That question is one all credit managers of private companies and banks must wrestle with year in and year out.
The student loan debacle is hidden behind the mortgage debt and credit card debt problems in this country. The difference is that these creditors have some recourse to assets that the federal government doesn’t have today, and is unlikely to obtain tomorrow. Those institutions financing student loans only have federal government guarantees backing student loans. Such guarantees are further backed by the tax revenue collected from those who pay income taxes.
Around and around we go and where this problem ends nobody knows. However, the country should prosper if the 38% of today’s 12 graders who are proficient in reading and the 26% who are proficient in math are granted student loans. How we educate the rest of the underachievers is an unaddressed problem. There are no student loans approved for those students who choose to attend the school of hard knocks! Due to the Great Recession caused by poor surveillance of mortgage banks, many of these lads and lassies will end up in the prison education system.
Students need to learn an important lesson: Americans didn’t become prosperous by borrowing money and not repaying it. Today, rolling over a debt at maturity is a common practice of many borrowers. That financing philosophy assumes that hyper-inflation will follow a recession which is another symptom of a mismanaged economy.
Responsible citizens learned years ago that debtor prisons didn’t achieve their goal. After studying the sad results of giving loans to college students, modern citizens will eventually learn that student loans are another failed invention of socialism.