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The Truth About the Student Loan Crisis

Preston Cooper of FREOPP says that student loan crisis is not what we think

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TRANSCRIPT

Is there a Crisis?

President Biden will not allow anybody in this administration to use the word “crisis” in discussing the border. I am now using it to discuss a related issue: student loan debt.

“The people we really need to be worried about are the people with less than $10,000 of debt — the people who went to college for one or two semesters, who dropped out — but they don’t have the degree.”

The people we really need to be worried about are the people with less than $10,000 of debt — the people who went to college for one or two semesters, who dropped out — but they don’t have the degree. The statistics show that those people are actually much more likely to fall behind on their loans than the people who do graduate college, and who the media wants us to believe are the people who are really having trouble.

What Makes Student Debt Special?

Somebody borrowed money, which didn’t produce the revenue. The expenditure didn’t produce the revenue to pay it back, like borrowing money to buy income producing assets. They wasted their money. People waste money all the time. People make bad purchasing decisions. They buy cars that are too expensive. They buy cars they shouldn’t be buying. Many of those very same students owe money on car loans.

“The student debt crisis is largely a product of the federal government’s irresponsible lending that we got into this mess to begin with.”

We see that student loan default rates are much higher than they are for car loans or for mortgages. I don’t want to excuse the student here because the students still did sign on the dotted line. That’s why I don’t support student loan forgiveness because if you take out a loan, you do have responsibility to pay it back. At the same time, we can’t ignore that the federal government is complicit in all this. It’s largely a product of the federal government’s irresponsible lending that we got into this mess to begin with.

The Origins of Federal Student Loans

There was a time that the federal government had almost nothing to do with this consumer lending product. When you wanted to go to college, you went to a bank, and borrowed money from the bank, or perhaps the university or the college would have a program to lend you money. It was all being done by the private sector with whatever credit standards the private sector decided to extend. It was no different than a loan for any other purpose. How did we get from that, which worked, to the feds being the only student loan creditor?

“As we all know, there is nothing so permanent as a temporary government program.”

As we all know, there is nothing so permanent as a temporary government program. Over the years, the government just started expanding the student loan program. The first time came in 1965, when we expanded this from just science and technology education to all low-income students could then get a student loan from the federal government. We kept expanding it again in the 70s, 80s, and 90s. We opened it up to all students.

“A few decades later, 2021, we have over $100 billion worth of student loans going out the door every single year. We’re going to make $1.2 trillion worth of student loans over the next decade alone.”

The program has just slowly grown for these discretionary expansions that happen every five or 10 years into a $1.7 trillion behemoth. All because of Sputnik.

“If you’re not fully honest about how much something is going to cost, it’s easier to raise the price of it.”

If you’re not fully honest about how much something is going to cost, it’s easier to raise the price of it. We see that 15–20% of students who have loans today don’t actually know that they have loans. This is a huge problem because if people don’t know they have loans, how are they supposed to know that they’re supposed to pay them back? That’s why I do have some sympathy with the students here because they have been somewhat bamboozled by the colleges and by the federal government into taking on loans that they didn’t necessarily know they were taking.

Other People’s Money

It has been observed by economists the two segments of our economy where the increase in costs vastly exceed the inflation rate are healthcare and in college tuition — higher ed. Those are the two dominant segments of the economy where the buyer doesn’t know and doesn’t care about the cost. The buyer is spending somebody else’s money. When government dollars drive the cost, we lose the control of the intelligent buyer shopping for the best price.

Debt Forgiveness for the Wrong Constituents

We have a bad program, IDRs, which is in place and nobody is talking about. Let’s repeal it. What is the crisis that the government thinks has to be fixed?

Federal Collection

Student loan debt cannot be generally discharged in bankruptcy. It’s a special kind of debt. You’re really stuck with it for a very long time, because you owe it to the federal government for the most part. If we did nothing, what bad things will we be reading about in 5 or 10 years that we’re not reading about today?

“This is the story that the media is ignoring about student debt — it’s not the people with $100,000 — it’s the people with very little student debt with this problem.”

The government doesn’t send you a letter saying we’re adding fees to your balance. They just do it. The borrower doesn’t even know sometimes that thousands of dollars of fees are being added, more interest is being added, because the government is just not transparent about it.

The Biden Plan

Debt collection practices get a lot of legislative attention when it’s the private sector doing the collecting, and yet the federal government is the world’s worst debt collector. It’s hypocritical that the federal government feels it necessary about regulating debt collection, but they haven’t cleaned up their own debt collection practices. What is Biden proposing to fix the problem?

The Moral Hazard of Loan Forgiveness

What do you say to the student who went to college for a semester and a half, ran up $15,000 in debt, left college, and is now earning a living — perhaps has a family — and has over the past year, at great sacrifice, paid off the student debt. That hypothetical dropout was a sucker. Had he not paid off his debt in the 18 months right before the forgiveness was given, he would be $10,000 better off. The moral lesson that the country is giving is “Don’t pay your debts.”

“It’s a massive moral hazard, comparable to what we saw during the mortgage crisis.”

It’s a massive moral hazard, comparable to what we saw during the mortgage crisis, where the federal government said, we’re going to bail out banks, we’re going to bail out mortgage companies. So the bank said, “why don’t we make a bunch of bad loans because we’re going to get bailed out no matter what.” I really see history repeating itself if we go down the road of student loan forgiveness.

“If you’re running a college that’s a dropout factory, we’re going to penalize you.”

The borrowers have the debt. The taxpayers suffer the losses. The colleges don’t have any accountability. My plan, in order to help out those people with sub-$10,000 debts is pay for the cost with a new penalty on bad colleges.— That’s going to cost some money, not as much as forgiveness, but some money. If you’re running a college that’s a dropout factory, you’re leaving a lot of people unable to pay their debts, you’re leaving taxpayers on the hook for all these debts that students can afford to pay, we’re going to penalize you, and we’re going to make sure that you can’t just take advantage of the generosity of taxpayers without paying some penalty when your education doesn’t prove its worth.

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http://bobzadek.com • host of The Bob Zadek Show on 860AM – The Answer.

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