The Solution to the Student Loan Problem

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Mark Kantrowitz

By Mark Kantrowitz

November 22, 2019

Gather around. We have wonderful news!

The solution to the student loan problem is simple and straightforward. It is amazing that nobody has thought of this solution previously, when it is such an obvious fix for the student loan crisis.

From now on, let’s refer to student loans as snarks (with apologies to Lewis Carroll). Then, we will no longer have a student loan problem, but a snark problem.

Instead of having to pass legislation to prevent loan sharking, policymakers will have to pass legislation that bans snark sharking. Doesn’t that sound so much better?

Plus, instead of having student loans charge interest, recipients of a snark will merely have to pay a snark premium. That’s definitely an improvement.

Since snarks are a new and innovative solution to the student loan problem, there is not yet any research on the impact of snarks on college graduation rates, job placement rates and income after graduation. It is too soon to tell whether snarks cause delays in marriage, home ownership or other life-cycle events, so let’s just assume that they don’t.

Boom! Problem solved.

Giving Credit where Credit is Due

Of course, no idea is truly ever completely new, so we must give credit where credit is due.

The idea of solving the student loan crisis by creating a new name for education financing was first introduced by Income Share Agreements or ISAs. One prominent university even declares in its ISA marketing materials that “It’s not a loan.” They argue that ISAs don’t have a principal balance and don’t charge interest. Nobody will need to worry about repaying their student loans ever again.

Wow! Let’s tip our hat to these masters of redefinition. They just magically declared the problem solved.

They make it so easy to forget that investors in ISAs expect the recipient of an ISA to pay back more money than they originally received to pay for their education. Like most lenders, ISAs do not have a charitable purpose. Where would be the fun if you couldn’t squeeze some profits from desperate students?

The new name means ISA programs are unregulated, or so they claim. This presents a new opportunity to exploit hapless students. Proponents have even introduced legislation to exempt ISAs from state usury laws.

After all, if income-share agreements don’t charge interest, just a multiple of the borrower’s annual income after graduation, they shouldn’t be subject to usury laws.

The reality is that any increase in the amount received by a lender beyond the amount lent is interest. Excessive gain is usury. That’s why ISA proponents want lawmakers to declare that ISAs are not usurious.

One ISA caps the total payments at 2.5 times the amount borrowed. Sounds reasonable, eh? But, that’s the equivalent of charging a 28% interest rate over a 10-year repayment term, or five times as much as the current average interest rate on a federal student loan.

They say that they want “to liberate as many students as we can from avoidable student debt.” Along the way, these self-proclaimed freedom fighters also want to liberate students from their wallets and hard-earned cash.

Real Problems Deserve Real Solutions

Superficial changes to the name of a problem do not provide a real solution to the problem. There are no simple solutions, no magic bullets that can make the problem of paying for college go away.

Moreover, misdirection and deceptive rhetoric do not actually solve the underlying problems. We don’t really have a student loan problem, so much as a college completion problem. Most students who graduate do not have a problem repaying their student loans. Borrowers who drop out of college are 4.2 times more likely to default than college graduates. Two-thirds of the defaults are from college dropouts. They have the debt, but not the degree that can help them repay the debt.

The solution to student loan debt is to borrow less, either by saving more before college, enrolling in a less expensive college such as an in-state public college, or cutting spending on living expenses. Nobody forces you to borrow more than you can afford to repay. The federal and state governments also need to start paying their fair share of college costs by replacing loans with grants.

For borrowers who already have student loans, consider these tips:

Beware, my beamish friends, lest you discover that the snark is a boojum. For then the snark will softly and suddenly vanish along with all of your money.

A good place to start:

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