Wednesday, December 28, 2016

It's a Wonderful Life: Student Loans

It isn't whether you win or lose, but….

Whether one even sees that there is an issue associated with student loans depends upon one's approach to the game of accomplishing socially desirable objectives. Differences in attitudes about student loans reveal how people approach the game. Some people see only one way to subside demand for education. Their approach whenever there is a problem is for the government to throw money at it. A totally different approach is to try to figure out how society can be organized so that the educational objective is achieved as a natural result of the way things are organized.

A previous posting suggested that the wrong institution, government, is accepting responsibility for guaranteeing student loans. If subsidizing educational demand by lending students money to finance education is appropriate, primary beneficiaries of subsidized demand are the academic institutions and their faculties. They should participate in risk associated with the loans in some fashion.

The academic institutions that benefit from subsidizing demand are only a part of the story. Those who overlook the possibility that there are solutions other than the government throwing money at the problem, frequently fail to recognize that all policy issues involve individuals. Students and their families are involved.

At this time of year it seems appropriate to use the classic movie "It's a Wonderful Life" to illustrate the point. In previous years the movie was used to illustrate points about good financial management both at the personal and national policy levels. That is not too surprising given the relationship between good personal financial management and a wonderful life.  In addition, national financial events are an important backdrop for events in the movie. However, the movie's relevance to how student loans relate to a wonderful life is more subtle. It illustrates an unfortunate and telling change in attitudes toward how one should achieve a wonderful life.

“It's a Wonderful Life” reveals so much about how to achieve a wonderful life that it's easy to miss the message regarding student loans. However, attitudes toward getting a higher education appear at a number of points during the movie. But the dinner conversation between George Bailey and his father is particularly telling.

The conversation covers a number of topics, most importantly the father-son relationship between George Bailey and his father. But, with regard to education, it shows just how much achieving an education was considered a family affair. George references working to save up money to go to college, and he discusses how he and his brother plan to coordinate their efforts to get a higher education.

What is particularly relevant is that there is no assumption that the world owes them an education. Rather, it is something they can achieve, and it's their responsibility to achieve it if that's what they want. Perhaps the message of the movie is that that attitude of accepting responsibility is the key to a wonderful life.

It is unfortunate that we as a society are depriving a generation of that sense of achievement. As discussed in a previous posting entitled “Educational Loans: Dare We Ask Who Benefits from the Subsidy?” there are social benefits to having an educated population. That previous posting argued that given our current approach, it is unlikely that we will get a level of investment in education that results in achieving the appropriate social benefits. One might also argue that achieving that objective without facilitating the growth of a sense of responsibility is inappropriate and is a disservice to the individuals involved.

More importantly, acknowledging the benefit to society is quite different from saying that any individual is entitled to education because of the potential social benefit of having a generally educated population. The issue is illustrated in a December 13 WALL STREET JOURNAL article. The article is entitled, “Student-Debt Plan Faulted: Some people who paid off their loans see an injustice in federal forgiveness programs.”

The subtitle pretty much says it all, but the article is quite explicit. It reports that some people who paid back their student loan are “enraged to learn that millions of other borrowers will get off easier. The government is set to forgive at least $108 billion in student debt in coming years under plans that set payments as a share of borrowers’ earnings and eventually forgive a portion of their balances.”

One can focus on the injustice of it, but there is a more important point. Those who have paid off their student debt have a right to feel that they earned the right to their education. They achieved it by accepting responsibility to return to society the resources that society provided to them to facilitate their education. Is it legitimate for them to feel that the federal government wasted $108 billion by educating people who are proving that they didn't deserve the subsidy the government provided by lending them the money?

It's possible that the $108 billion wasn't a waste. It is just possible that a subsidy of that magnitude in addition to the subsidy implied by the government guarantee of their loans is justified. Perhaps there is that much benefit in having people educated. However, it would seem illogical to argue that subsidizing people who don't repay the debt is more productive than subsidizing the more responsible borrowers who chose to pay back the loan.  Arguing that lending to irresponsible people is desirable seems like a stretch. Especially when one considers that if the loans are repaid, society can then lend to other students.

One also has to wonder:  How do those who were never able to go to college for financial reasons feel about paying a share of the $108 billion? The injustice argument certainly seems relevant since they never had the benefits of college but are paying so that others can. One also has to wonder why individuals who never went to college but lead responsible adult life aren’t equally deserving of a subsidy.

The last posting on educational loans was over a year ago, October 27, 2015. Further, the inappropriate structure associated with student loans is not a new phenomenon. The WALL STREET JOURNAL on December 21 had an article entitled “Unpaid Student Loans Bite Seniors.” The article reports that, “The federal government is increasingly taking money out of Americans’ Social Security checks to recover millions in unpaid student debt, a trend set to accelerate as more baby boomers retire….Overall, about seven million Americans age 50 and older owed about $205 billion in federal student debt last year. About 1 in 3 was in default, raising the likelihood that garnishments will increase as more boomers retire.” So, why is another posting on the topic timely now?

There are four reasons to revisit the issue. One is the sheer size of the misallocation of resources involved. $108 billion is a significant sum, and, like any government expenditure, there's no reason to believe that it won't grow. Especially, when one considers that many baby boomers and current students don't view their student loans as an obligation to society.

Second, we have raised a generation who don't think in terms of being worthy, but rather think in terms of being entitled. People who think the government should pay for their education are not likely to feel responsible for repaying society for the resources they've used in getting their education. We certainly haven’t created an educational system that instills a sense of responsibility in students.

Third, both political parties should be willing to address the issue. One political party likes to emphasize the social benefits of higher education to the absurd level of suggesting it should be “free,” or put more honestly, paid for by someone other than the recipient. The other is headed by a president-elect who has acknowledged the obligation of higher education to provide a service of value:  By settling a lawsuit related to the University that bore his name, he has acknowledged that responsibility. Perhaps he will realize that the same approach should extend to all institutions of higher learning. Every college would have to provide value if they were forced to accept the financial risk associated with student loans. It would certainly be a more socially efficient approach than forcing students to sue their colleges when they don't think they received adequate value.

Finally, the previous posting back in October of 2015 was incomplete. If the government is taken out of the role of the student lender or guarantor of student loans, the basic structure of the student loans is no different from any other loan. The government may provide a subsidy in a form other than a loan guarantee, but there's no reason why that subsidy has to dictate the terms of the loan.

Student loans could then be treated like other loans, and if it’s impossible to repay them, they could be dismissed in bankruptcy. Thus, students who borrow and then repay or that finance the education within the family, as in the “It's a Wonderful Life,” will demonstrate how to play the game: take responsibility, be grateful for the opportunity, be thankful for the subsidy that would replace the loan guarantee, and do the best you can. Win or lose that seems like a better route to wonderful life than living with the illusion that others are responsible for your future.