Solving the Student Loan Debt Problem

The Medicine Will be Difficult to Swallow

There is a common misconception that forgiving student loan debt will be an economic boon for all. That the now free-of-debt college graduates will spend freely, purchasing homes and cars, thus contributing to real economic growth.

Sorry, but this cannot possibly be true. The wealth that was transferred from the taxpayers to the graduates, many years ago when they attended college, has already been consumed. It is gone, and printing money will not magically revive it.

Per my prior blog, Wealth is Not Money, and Money is Not Wealth:

“If money was wealth, then governments could simply print their way to prosperity. Many have tried, all have failed.”

A stroke of the Presidential pen will not return this wealth to society. It needs to be recreated, and there is only one way to create wealth, namely:

“Wealth can only be created by applying productive labor to other economic resources.”

In other words, it can only be earned via work, over time. The solution is not a convenient, vote-pandering political shortcut.

Many believe that the value of a higher education is intangible, that we should not spend too much time analyzing the cost and the benefit.

I disagree.

Our higher education system consumes a tremendous amount of our society’s economic wealth, and thus demands oversight. It would be irresponsible not to do so. Its primary purpose is to produce highly educated graduates, supplying our society with critically needed doctors, engineers, scientists, accountants, etc. These professionals not only make scientific discoveries and advance our technology, they make our economy more efficient, increasing the standard of living for all.

Assuming that their valuable skills are in high demand, these graduates will realize a positive ROI on this investment of time and wealth. Meaning that they will earn more than they would have without the college degree, even though their earning career will be 4-8 years shorter than those that bypassed college.

Enabling them to return any borrowed wealth back to society.

It is acknowledged that some students can pay the full tuition at a private college, in which case they can study whatever they want. In contrast, those that attended a state-subsidized college, took out a college loan, or both, owe a debt back to society.

How do we know if the graduate is engaged in enhanced productive labor, making our economy more efficient, creating more wealth for all? In a competitive decentralized economy, that will almost always be associated with a higher salary, indicating that the graduate’s enhanced skills are in high economic demand.

Instead, the inability of so many graduates to repay their debt strongly suggests that this is not often the case. Implying that for many, a college education was in fact not a sound economic investment, that they are not more economically productive then the “uneducated.”

Meaning that they will never make up for the time spent and wealth consumed.

This waste of economic wealth, and the associated reduction in the standard of living for all, is never acceptable. It is selfish behavior, and those that encourage such selfish behavior should be held accountable.

Given this, why instead reward such poor & selfish economic decisions by “forgiving” student debt? By letting the graduate off the financial hook, there will be even less inventive for them to work hard, to repay their debt to society. Even worse, it sends the signal that this loss of valuable economic wealth is acceptable, that the universities need not change their ways, and students need not act like responsible adults.

There is nothing acceptable about this. And it gets worse.

Because wealth and economic resources are inherently scarce, everyone must make multiple economic decisions every day. We decide when to work (to create wealth), and when to play (consume wealth). Which services and products to spend our wealth on.

We prioritize, knowing that it is only fair that good economic decisions will be rewarded, and poor ones will cause discomfort. Thanks to this fair but uncaring economic feedback, most economic decisions are good ones, a requirement for a healthy, wealth creating economy, which raises the standard of living for all.

Wasting wealth on an unproductive college education, which is equivalent to paying some not to work for 4-8 years, is inflationary in two ways. It tends to expand the money supply (because our government needs to borrow more), while simultaneously creating a labor shortage. The inflation we are experiencing today is largely due to paying people not to work during times of Covid.

It is this very inflation that signals a decrease in our standard of living. Poor past economic decisions punishing most of society today.

Especially punishing the retired elderly and those in the lower income brackets. Which is what comes to my mind when I see the images of the entitled college students screaming for student debt forgiveness.

Our federal government plus many colleges & universities have created this significant economic problem. What is the solution?

Start by acknowledging that the economy is providing a valid feedback signal, that starting salary is an indicator as to what professionals our economy requires.

Next acknowledge that the choice of major is an adult decision, with adult consequences. We all know that english & art majors are much less likely to repay their loans then engineering majors, so why keep our collective head in the sand?

The solution is obvious. For any subsidized college education, tuition should be a variable, inversely dependent on the expected starting salary for each degree. An English major will pay $15,000 per year, while the engineering major $10,000.

I can already hear the screams that I have this backwards, that this will incur a heavier debt burden on those least able to pay it back.

Yes, it will.

And the system will thus correct itself, producing much more needed engineers, and far less not-so-needed English majors, thus over time dramatically reducing outstanding student debt.

For the benefit of society, from which the wealth is borrowed from.

What exactly is so wrong with this?

While subsidized higher education should be available to all those that academically qualify, it is not a right. If managed efficiently, it has proven to be extremely beneficial for our whole society, if not the world. And selfish and irresponsible to do otherwise.