A lot of people have been whining about graduating from college with massive student loan debt. This obviously unfair system creates a heavy burden on those that apparently get nothing for something during their quest to find themselves only to find themselves lacking the capacity to repay their debt much less still acquire the newest iPhone or anything from Starbucks. The government is clearly at fault and deserves the huge loan loss expense generated by record default rates. Except, of course, that the government is We-the-People.
It seems that this is a direct result of the Law of Unintended Consequences and needs to be fixed.
What, you may ask is the Law of Unintended Consequences? In general, it is an unexpected negative result from an ill advised (or ill executed) attempt to do something positive. For example:
In one customer service contact center, analysts calculated that reducing average call time by one minute on millions of calls resulted in a savings of hundreds of thousands of man hours. So, they implemented a performance standard for average call time that was one minute less than the current average. Terrific idea, right?
Enter the Law of Unintended Consequences.
While all the productivity measures did show the anticipated improvement, managers noticed an unanticipated increase in the number of calls – a dramatic increase. As a result, more people were going to be needed not less!
It seems that, when a call was about to exceed the average time standard, the representatives (people being people) solved the problem by – wait for it – hanging up! Each time this happened, the customer had to call back, thereby increasing total calls. Management had to go back to the drawing board and get smarter about how they got to their desired goal.
The same applies to Federally Insured Student Loans – benevolent concept, poorly executed. As a former banker, it seems to me that the first step in any lending program is to treat it like a lending program. (This is a revolutionary concept so raise your hand if I am going too fast.)
Simply stated, the criteria for a normal loan include the three “C’s” – Credit, Collateral, and Capacity. The problem is that the typical student is zero for three. Borrowers typically have no credit history, no collateral assets, and no income. Nobody said this was going to be easy.
There really is not much a lender can do about lack of credit history and student loans are unsecured. But, let’s examine the issue of Capacity.
It is true that most students do not currently have the capacity to repay a library fine, much less a large loan. The working assumption for student lending is that all of this higher learning is going to prepare graduates to become gainfully employed and have the capacity to repay in the future. I am willing to buy into that – up to a point. The problem with student lending is that that point was apparently besides the point.
Most people probably can grasp the concept that they have enough income to afford a KIA, but not enough to afford a Porsche. Lenders clearly go through that analysis in evaluating credit applications. Yet, the government must have skipped that day in the Lending for Dummies class.
On any loan except a student loan, the amount of the loan is limited by the amount the borrower can afford to repay. So, how do we address that when the borrower is not yet employed?
Tah-Dah! Establish maximum loan amounts based on an imputed average income levels for the student’s course of study. The table below is how that could look:
In this example, we used a starting income for five different majors. (These are made up for illustrative purposes. In practice, there are copious amounts of data to use in arriving at reasonable figures.) Each level was ascribed an annual salary increase and the results were averaged over ten years. We adjusted for housing, food, medical, and other living expenses and used 25% of the residual as the allotment for maximum student loan payment over a ten year period. That was used to back into the Maximum Loan Amount.
So there you go. It isn’t perfect, but certainly a step in the right direction. If a student wants to major in underwater basket weaving (UWB) so that it doesn’t take too much time away from partying and copulation, that is their right. It is just that we-the-people shouldn’t be expected to overpay for it.
What about the colleges whose UBW tuition is paid by funds from student loans? Hmmm…law of supply and demand suggests they will have to lower their tuition. That is good for the student and the future of UWB professionals everywhere.
Be careful what you ask for.
The same holds true for compensating the Professors of UBW. They have been arguing forever that they should be paid what they are worth. – Their wish is my command.
In this day of multi-level regulation and required disclosures, it seems to me that every university should be required to make at least the same level of disclosure as required for how much gluten is in tortillas. For example, disclosure should include the anticipated earnings for each course of study, the tuition and other costs of obtaining a major in that course, annual cost as a percentage of new earnings (ACNE) and the average rate of return on that school investment (ARRS). Maybe some people would be better off foregoing being underwater in debt with a prestigious university degree in UBW in lieu of a trade school certificate in plumbing to keep others from being underwater.
Nothing about this says that a person couldn’t study anything they want. We are just talking about what the government (we the people) will pay for. Nothing about this adversely affects the poor or disadvantaged. To the contrary; it informs and protects them. Nothing prevents under-represented industries from providing loans or scholarships. In fact, if this system resulted in a shortage of qualified underwater basket weavers, associated compensation would increase and drive higher student loan amounts.
I know. Disrupting the gravy train for those of the current education establishment would make them apoplectic.