The Real Student Loan Debt Problem

Nobody likes student loan debt.  An Article recently published by the Forbes explored the potential for problems associated with aggregate student loan debt.  There are currently 44 million borrowers with $1.3 Trillion dollars of student loan debt.  Bearing this in mind, the scope of the problem seems immense.

The concern expressed by many is that the burden of student loan debt will suppress people’s future disposable income.  To many, this presents a dire scenario.  Future consumption spending cannot grow under a crushing burden of student loans.  It is complicated by the high rate of underemployment among recent college graduates.  This has led many to believe that government action is required to “fix” the problem.

The Solution that Isn’t a Solution

When college students gather in protest rallies, they frequently hold up signs demanding that their student loan debt is forgiven.  The overwhelming majority of student loans are underwritten by the US government.  Thus, you would effectively turn $1.3 Trillion of private debt into $1.3 Trillion of public debt.  This sounds great for people that are looking for a handout.  It also sounds good for politicians looking to buy votes with government money.  Unfortunately, it does nothing to solve the underlying problem.

Many (mistakenly) think that the pile of student loan debt can be dissipated with additional taxes on the wealthy.  Unfortunately, this strategy has two main deficiencies.  The first is that there aren’t enough wealthy people to pay the taxes.  The second is that most wealthy people hire lawyers and accountants to reduce their tax burden.  This is typically done with (legal) income sheltering strategies.  The ultimate result is that the government is unable to tax away its debt.  This means the only remaining option is to inflate the currency.  Inflation disproportionately impacts the poor and middle class.  This means it will ultimately end up coming back to bite the people who were attending the protest rallies in the first place.

The Real Problem

The real problem is not that so many people carry so much student loan debt.  Rather, it is that so many people have chosen to take out large amounts of debt to finance an education that does not have a significant market value.  Another way of stating the situation is that people who study subjects like engineering and business do not have a student loan problem.  The reason is that their education prepares them for a career that allows them to generate an income so that their debts can be paid off.

The Real Solution

Understanding the real problem is the first step toward a real solution.  The only way for this lingering problem to be solved is for the people who are under all of this debt to become gainfully employed so that they can pay their debt back.  However, attaining gainful employment requires that better decisions be made in regard to the course of study that one pursues in their path of higher education.  This is the only method of dealing with this problem that will not result in a simple transfer of the burden to somebody else.

The truth is that all choices involve cost.  The decision to attend college is frequently very wise.  However, it is highly important to choose a course of study that is consistent with your long-term career interests.  Studying the arts is fine if you are content with living the life of an artist.  However, if you desire to climb the income ladder, then you must acquire skills that will allow you to generate value for an employer that is sufficient to justify a favorable level of compensation.

What it All Means

Student loan debt is not fundamentally different from any other kind of debt.  It is not good or bad in and of itself … student loans taken out to acquire skills that allow you to earn a good income to support your family are very wise decisions.  Loans that were taken out to finance a degree that offers no employment prospects are much more suspicious.  All debt is fundamentally neutral in nature.  It only becomes good or bad when paired with an investment that is good or bad.

Thus, the answer is for more people to make better decisions regarding what they study.  Investments of time, money, and education are what will define whether any resources borrowed to make those investments were wise. The path to prosperity comes from making better decisions.  Each day is a new chance for us to learn.  We should seize those learning opportunities to make each successive day more prosperous than the last.

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