What Really Caused the Student Loan Bubble…

In case you missed part I yesterday, I was talking about Elizabeth Warren’s new plan to erase outstanding college debts for roughly 45 million Americans and then make college “free” for everyone going forward.

Now, there’s no doubt that spiraling college costs – and a rapidly-growing pile of student loan debt – IS a problem.

Indeed, as I pointed out yesterday, the average tuition and fees at a four-year public college rose 66% between the 2006-2007 and 2016-2017 school years.

That’s pretty incredible, especially when you consider that the period included the Great Recession!

What’s equally incredible is another fact I pointed out yesterday: Namely, that Senator Warren and her husband were both Harvard professors during that period pulling in as much as $700,000 a year for teaching there!

(Her husband continues to make hundreds of thousands teaching there to this very day, in fact.)

Of course, outlandish spending by universities is still just a symptom, or perhaps a byproduct, of the real root cause of the student loan bubble.

The Real Culprit

The real root cause is the U.S. government.

Shocking, I know!

See, your typical family doesn’t have $30,000 or $40,000 saved for each of their kids to go to a public or any other college for that matter.

Nor do they have hundreds of thousands for private colleges and universities.

Enter the huge market for student loans, which aim to make college “more affordable.”

You know, kind of how a 10-year car loan makes a Mercedes more affordable.

Or how zero-money-down, adjustable-rate mortgages made McMansions way more affordable during the last housing boom.

The similarities are so glaringly obvious that I can’t understand why more Americans don’t see them. Sure, it’s true that a college education may be a better long-term investment than a luxury car … but it certainly isn’t a guarantee.

Yet that idea hasn’t prevented lawmakers like Senator Warren from perpetuating the myth that a college education is a sure-fire way to a better lot in life and find new ways to subsidize the costs.

During first two decades of the new millennium, the government has largely done this through various federal student loan programs and guarantees.

Warren’s plan would just make it direct from taxpayers.

Why It’s Like Any Other Bubble

For the record, I am not saying private lenders have been blameless in this whole mess. Far from it!

But as with any other bubble, this process has become self-fulfilling …

Money gets easier.

Prices go higher.

As prices go higher, people need to borrow more money. Or other “affordability” measures are put in place.

Then the cycle continues until it bursts.

The governmental backstops are precisely what allows private lenders to go wild. The easy money is what allows colleges to continue spending more and more money in a never-ending marketing arms race to attract more students.

And the government’s insistence that a college education is not just a necessity – but a natural born right – convinces everyone to continue participating in the madness. It is literally identical to the housing bubble.

So yes, higher education is still a noble pursuit that can be a good investment for many students.

Academically-qualified Americans should be able to attend universities regardless of their current financial situations.

Changing the Student Loan Market

The more we can make the student loan market similar to other lending models, the better — including giving borrowers the ability to refinance.

At the same time, let’s recognize that schools squander plenty of money on outrageous athletic programs … grandiose buildings and facilities … and bloated administrative salaries, which are then passed along via cost hikes.

Senator Warren and her husband were massive beneficiaries of the largesse itself!

Let’s also acknowledge that plenty of students use their easy-money loans to rent luxury apartments and eat at nice restaurants rather than pay for tuition and books.

Is it hard to imagine many people viewing their savings from Warren’s proposed program as “free money” to use for a vacation or some other discretionary spend?

At the end of the day, there is actually no such thing as free college tuition … someone is paying for it now or in the future.

Bottom Line

When my father was considering college in the 1960s, his family didn’t have the money for it. So he worked his way through school. It took longer than the usual four years, but he did it.

Meanwhile, perhaps because of that, my dad always impressed upon me the importance of good grades and hard work throughout my school days. And as I mentioned yesterday, that ultimately paid off for me in the form of an academic merit scholarship to attend a private university.

I came from a very middle class background … worked my butt off … and graduated from an expensive college without any debt at all.

Young people are still doing the same thing right now, no matter what Senator Warren seems to think.

So from my perspective, the idea of “free college” for all raises a number of serious questions and will simply fan an already-massive fire.

Meanwhile, imposing a retroactive, shotgun-approach forgiveness of loans already undertaken is grossly unfair to too many groups of Americans to list.

To a richer life,

— Nilus Mattive
Editor, The Rich Life Roadmap