Student Loans, In an Asset Class of Their Own
I know, I know, some of you are thinking, c'mon, you took out loans, now pay them back. I dig that approach, and I am just making a capitalist argument for placing capitalism back into the valuing of student loans in the financial sector.
Funny story; a few years back, in the 1980's, a bunch of high level banking lobbyists pushed hard for an exception to prevent bankruptcy in student loans. The argument goes, even if the individual turned in their degree, their brain still has the information they received. Shockingly, the lobbyists won their case, and the effect of this asset exception on capital markets could not have been predicted; US student loans are now valued at less of a risk than the debts of first world sovereign nations. That means that $100,000 debt of an individual American is less of a risk of default by a bank than the debt of the countries of Ireland, France, and Spain. When the risk of issuing debt is undervalued, banks have an incentive to loan to more people. When more loans are outstanding, this leads to inflation of such an asset class. According to a 2010 report by the Economist magazine, the cost of state subsidized education has gone up by a factor of 14 in-state tuition, and a factor of 24 out of state in the past 40 years. That is 1400% and 2400% increase; and this is for an education that is already state subsidized.
My personal story, is actually wicked funny too. I decided to get an Executive Master's Degree in Financial Statement Analysis and Securities Valuation from Baruch College (which means I way overpaid for a public MS, $45,000 for an in-state Masters). It's a thirty-six credit master's degree with a curriculum that mirrors the Chartered Financial Analyst (CFA) designation, and many of us who enrolled were in banking and sought a highly focused degree that would put us in the running for a banking analyst position out of college, an industry that was doing well up until that time.
Week two of my program, Lehman Brothers collapsed, and as we all know, the world was pulled to the brink of financial meltdown. Almost five years later there are 40% less analysts working on Wall Street than there were at the point of enrollment. To add insult to injury, the head of the Executive Programs at Baruch College was caught forging grades for students, so the college would not lose out on such a lucrative stream of revenue. Tarnished degree or not, one still 'must pay' according to our current laws.
Are exceptions for particular assets acceptable in a capitalist economy? For those of us in our childbearing years, are you afraid of how much money college will cost your children? Do you think it is time to change that which prevents our nation from being the leader of innovation we are destined to be? I do.
Let's Build the Future
*X Reinstating Bankruptcy Protection for Student Loans