You Took Out the Loan – Repay It!
Is that really the best way to look at student loans? Let’s break down how this really happened. After all, we cannot really fix a problem unless we identify the problem first.
Let’s start with the fact that we sent our kids to government institutions of learning. We ensured that they spent most of their youth in front of a government employee that was told to tell our children (almost every single day) that college was important. They told our children that in order to get a decent paying job, a college education was essential. This was also reinforced by the fact that, as parents, we told our children to listen and obey their teachers. What did we think was going to happen?
Then our kids came home and most parents reinforced such statements with declarations of the importance of an education in today’s world. The cost of such education wasn’t really a big part of that indoctrination. And if they didn’t get that speech, they might have seen their parents struggle because they didn’t understand economics but knew that they wanted a better life. So perhaps the kids associated economic hardships with a lack of education and wanted to a better shot at financial stability. Or perhaps their parents did well because they had a college degree during a time when most didn’t but the job market desired it. Regardless of which occurred, what did we think was going to happen? And since most don’t have thousands just lying around, they were pretty much forced to take out student loans.
So let’s talk about guidance. What guidance was given to our children in regard to direction or major? Well, as a society, we have brainwashed our children into doing stupid things like “follow your heart” or “do what makes you happy”. Aside from the fact that this is terrible advice, this is why Liberal Arts degrees with ridiculous majors are common. What in the world did we think was going to happen?
But it’s actually so much worse than all that. Let’s examine the fact that the rational part of a teen’s brain isn’t fully developed and really won’t be until age about 25. With everything that I’ve presented thus far, are we seriously going to expect our children to make a responsible and thoroughly though-out decision regarding their future? If you think that this would have gone any other way, then I almost don’t know what to tell you. But seriously… what other outcome could you really expect?
So it’s NOT as easy as “You took out the loan; pay for it!” If we force all these conflicting messages about college into the minds of our children, we must own part of the fallout. Because again… what did we think was really going to happen?
Interest on the Loans
Unfortunately, it’s not really the loan itself that is the problem; it’s the interest. The way that most student loans work is by charging what is known as compound interest. Compound interest is calculated on the principal amount of the loan, PLUS the accumulated interest of earlier periods.
Let’s make this simple. Let’s say a student has $10,000 student loan debt. And let’s say that (for whatever reason) they have to put off paying their student loans for 10 years – probably because their Liberal Arts degree didn’t land them the high-paying job that they were promised. At a low 3.96% interest, that student will now owe no less than $14,849 at that 10 year mark. That’s because that loan accrues interest at a whopping $1.10 per day. An easier way to say this would be that the student has to pay for the interest as well as the interest on the interest.
When the student enters the workforce, they are playing a game that for some, simply never ends. But let’s pretend that they were able to land a higher paying job. Of course, with a Liberal Arts degree, it likely wouldn’t be a slam dunk. So perhaps it’s just a little higher than they could have landed without the degree. Well, now they are getting taxed on their higher wages while paying on the principle of their loan AND the compounding interest. For many; it’s simply not worth it.
So now the government wins twice and society wins a little as well. The student… still waits to see the payoff. Now let’s talk about that tax part for a second.
The Tax Benefit
Of course our government wants people to get higher paying jobs. When people get higher paying jobs, the government gets more “revenue“. Society doesn’t seem to mind because they get all these great benefits from the government that provides such services through loans and taxes.
As previously stated, the student’s higher wages are taxed at a higher rate. This is because they supposedly fall under a higher tax bracket. But of course, they are paying a loan that won’t go away for some time due to the compounding interest. They don’t really have all this extra money to spend on things that would otherwise stimulate the economy. This is a problem on a couple of fronts. Sure, the government can give services for those in need, but the irony is that the student cannot buy goods which will stimulate the local economy. This can ultimately put people out of work and in need of government help. Does this sound like a cool scheme yet? What did you think was going to happen?
Remember that this student followed the advice of the people we told them to trust… and all to get a higher pay job that they cannot really reap the benefit of. Meanwhile, the banks, the government and those without a job get to reap the benefits of the student’s sacrifice.
So when the student eventually figures out that they got a raw deal and complains about it (like the rest of us SHOULD be), people in our society have the audacity to say something stupid like “I don’t care! You took out the loan… you’re so smart… you figure it out!”? Seriously? What did you think was going to happen?
The Economic Benefit of Removal
Yes, it’s true that society as a whole benefits from an educated population. This has been proven time and time again. But have we forgotten about the student in this assessment?
Now we are faced with a student loan debt crisis and our economy is on the brink. In a scheme that was likely methodically planned, our government is poised to assume a ridiculous amount of power as a result. The sad part is that the people who haven’t really thought this through are literally helping it along – albeit unknowingly.
Economics is a funny thing sometimes… but essentially it works well when people have extra money to spend. This is because that extra money is spent on goods that are made by people who have jobs making those goods. But when people don’t have extra money to spend, they don’t buy goods or they’re forced to buy cheaper foreign goods. When people don’t buy goods; there are no jobs to fill because there is no demand to make the goods anymore because nobody can buy them because they don’t have the extra money to spend. Simple enough? Gee… what could we possibly do to help people get extra money to spend on goods to help keep the people in our society employed and to keep government from gaining power by expanding the nanny-state?
Here’s a neat run-on sentence – imagine if those students who got the degree and actually landed a higher paying job, actually had the extra income they were promised they would make if they went to college to get the degree they were told to get. Got that image in your head? Here are a few questions to ponder: Do you think they would take that extra money and buy cars, houses, and various other goods? Do you think that buying such things would create a demand for more people to make such things? Of course it would! Meanwhile, the government and the citizenry would still benefit from the taxes generated on the higher income. It almost sounds like a perfect scenario – minus the excessive taxes; which is another issue in and of itself. But I digress…
The point is that it would actually be a win/win in many ways if we could just find a way to reduce the burden of the debt we have all but imposed on our students. This seems like a simple equation to follow. Unfortunately, this tiny little article is unlikely to change much of anything and we will watch as our economy continues to crumble and our government continues to grow.
But if you happen to be one of the few that can see this problem for what it REALLY is, then perhaps the next time you hear a student complain about their student loan burden, have a heart and realize that they are really more of a victim of the system that ensured that they would become a slave to the debt that was literally pushed upon them by the people they trusted most.
Most didn’t really think about what was going to happen when it comes to student loans. Therein lies the biggest problem of them all. And here we are. In fact, the person who orchestrated some of the loan processing through Fanny Mae once said, ‘We unleashed a monster.’ Indeed, you have!
But that’s not even the worst of it. Tuition rates are now 1400% HIGHER than they were in 70’s. It’s not because prices are on the rise. In fact, tuition rates are actually at least four time HIGHER than the rate of inflation. It’s an unfair and broken system. Something must be done.
Now, I’m not saying that we need to just wipe everything clean. Even though that would likely create an unrivaled boost in our economy, that is probably not prudent. However, if we could apply some actual thought to the problem of student loans, we might be able to do some actual good for everyone. Solutions might include simply getting rid of the compounding interest burden and working with the principle. If we did that, we might see a massive shift in our economic health and the overall well being of our students. Besides, the government probably shouldn’t be profiting off of it’s youth anyway. After all, that’s definitely NOT what the Founders had in mind… or anyone else for the first hundred years or so…
“The goal to strive for is a poor government but a rich people.”Andrew Johnson (President of the United States from 1865–1869)
If you want a deeper look at student loans, you could review an article I did a few years ago by clicking here.