Rotten Capitalism

3 ideas to fix the student debt crisis in the USA

The total credit card debt in the US is $679 billion, auto-loan debt is $737 billion, but who would have thought that student loan debt is now nearly over 1 trillion dollars?! This can’t be good, since people already covered in debt are less likely to spend money and less likely to take the risk for a startup for example. Some people already say that the next big crisis will be the student debt crisis, as a result of a generation of heavily indebted students, who won’t be able to consume as their generations before.

Here are some recent ideas how to fix this:

1) “SoFi” short for Social Finance is a for-profit organization who connects alumni and investors to students to provide cheaper loans.

Excuse me?! So we save the problem of too much debt, with generating even more debt? Additionally, not only the investor wants a profit, but also “SoFi” wants a cut. How can that ever solve the problem, I am asking?
The problem with giving loans to students, is that they get used to the debt burden in younger age and can’t see the long term effects the loan has on their lifes. Most importantly, there is no incentive for universities to cut costs. They can continue to increase tuition fees and students will just pay with ever more loans.
In countries that don’t have tuition fees or just a very low fee, students try to finance their complete lifestyle without generating any debt. So when a country like Germany introduced about $1250 tuition fee, there were huge protests. Yes, about $1250 yearly (!). Similar things just recently happened in Quebec. However, if students just get more loans, they simply don’t care, because what is the difference between $100,000 and $120,000 debt anyways, right?

2) FixUC.org, has proposed a model to the University of California where the University gets 5% of the next 20 years future earnings for giving free schooling. By FixUC estimates this would eeven more than double the Universities revenues. Someone earning less than $30,000 yearly is exempted and there is a cap of $10,000 for high earners.

This plan makes more sense. It gives an incentive to the University to cut down costs and make the University run more efficiently. Moreover, its in the Universities best interest to prepare their students for the best possible job, since their revenue is directly connected to that. Still, 5% over 20 years is a huge burden for any student. Just think of how much money you would make if you would save and invest 5% of your salary every year over that timespan, Yes, it actually might be more than your tuition, if, and only if, you get a well paying job.

3) Loan forgiveness is another proposal. For example wipe out the loans for everyone who has paid 10% of their salary for over 10 years.

This may be very well a good short term measure to solve the problem now, especially with companies aggressively collecting debt from young and old who simply can’t afford to pay back. However, this does not solve the problem and gives no incentive to make the system more efficient and affordable.

There must be several criteria:

• A student loan should never be an attractive investment for banks or anybody else. This would just drive the incentive to increase of tuition fees and loans.
• It must be in the interest of the university to work as efficient as possible and as a result cut tuition fee as much as possible.
• The government and the tax payer have to ask themselves, how much is education worth for a country and how much the government should invest.

(Source: Fast Company, Issue 168, October 2012)