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Student Loans- A Student’s First Lesson in Economics

I am fortunate enough to sit on two boards that provide loans and grants for college students. It is an honor to be able to help young people further their education.

The concern that I have is that people barely into adulthood are forced to make financial decisions, often with little or no guidance, obligating themselves with loans- sometimes in big amounts.  Some parents are qualified to advise their children, but many are not.  One would think that colleges or the government would require that a qualified advisor would go over the facts of a potential loan with the student and their parents, but from what I have seen this is not the case.

When students see that they are approved for a loan, they may assume that everyone else takes loans, and it is the thing to do.

Many student loans have provisions in them that delay payments while in school, and/or limit payments as a percentage of income. That is good, but that doesn’t repay the loans. They hang out there and grow because of compounding interest. I have seen student loans still on the financial statements of people many years out of college.

Students today want the full experience, whether they can afford it or not.  Lots of people used to commute to our local colleges. Now, everyone wants the “on-campus experience”.  Villanova University, for example, which was mostly commuter completed a massive expansion of dormitory space.  I can understand preference for in-person learning versus internet classes, but saving money by living at home and commuting makes good “cents”.

I’ve also seen some dumb decisions about where to attend college.  My advice to students would be to go where they get the best deal, and only after that consider a loan.  Community colleges and state related schools are often good deals for tuition- that is if you stay in your own state.  Some college bound kids make bad decisions to go out-of-state; that is where the advice comes in.  Going local or in-state and graduating with no or little debt is a lot better than going out of state and graduating with a six-figure loan.

Those intending to go into science, technology, healthcare, and accounting are in a good position to repay student loans, but others will find it a burden and a struggle. Sure, an arts graduate can start a business, be wildly successful, and be able to repay a couple of hundred thousand dollars in student loans, but why gamble?

The Biden administration has proposed a $10,000 across- the -board loan forgiveness program for graduates that are in debt.  While it may help some, this puts an undue burden upon the government.  Economist Marianna Mazzucato posits that governments are always expected to show up for the rescue, but never get to share in the reward when things turn out well.  How about a student loan where the government gets a benefit if a student loan borrower succeeds big and becomes a millionaire or billionaire?

As someone who has been looking at and promoting loans since I was a bank trainee in 1973, loans have a place. The time to take a loan is when there is a good opportunity for strong increases in income as a result of taking the loan, and when the loan can be repaid within a couple of years.  That’s the student’s first lesson in economics.


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