Get The Government Out of Student Loans

But not by forgiving them

I’ll be experimenting with a shorter format—600-700 words (~3 minute read)—to hopefully provide value while being more respectful of your time. Let me know what you think. Cheers!

Full disclosure: This author took out government student loans to pay for college back in his native Sweden in the 80’s. They were paid back on time (with some parental assistance—thank you mom and dad).

This past week the Supreme Court heard oral arguments in Biden v. Nebraska, challenging the constitutionality of the administration’s attempt to “forgive” (and I assume, forget) federal student loans. The question at hand is whether the executive branch has such powers or if potential cancelling of government student debt should be left to congressional legislation.

Legally, it will certainly be interesting to see where the Court lands. But morally, it doesn’t really matter. Because the fundamental question is whether the government should be in the student loan business in the first place? You’ve probably heard the practical arguments for and against. Proponents of government student loans (mostly on the political left) argue that we need them because college is too expensive for most low- and middle-income families and private financial institutions don’t seem to be willing to offer them at all, or at too high interest rates. Opponents (mostly on the right) counter that the government student-loan money printing drives college cost inflation as more funds are chasing a limited supply. This creates a vicious spiral of having to take on more loans to pay for escalating tuition, room and board. And if private lenders show limited interest at the subsidized rates, perhaps college is not such a great investment?

Back to the fundamental question: Should government be in the student loan business at all? Thinking morally right or wrong, not politically left or right, the answer is a resounding “no!” Government student loans violate individual rights on multiple levels. For example, taxpayers are forced to pick up the tab for defaulted loans (forgiveness would further aggravate this). And the fact that student loans are subsidized—the lower interest rates don’t reflect the real risk—means that private financial institutions are either marginalized or forced out of the market as they have to factor in the true risk. Finally, by offering student loans, the government is skewing demand towards attending college. This places employers in professions that don’t require a college degree at a disadvantage, as they are forced to compete for labor on unequal terms.

If government student loans are immoral, how do we get from here to there? How do we reach the government-student-loan-free shining city on a hill? The first order of business is to create the moral groundswell. Enough of us have to feel sufficiently morally troubled by the government student loan racket to turn up the heat on our elected representatives. Once they feel the temperature rising uncomfortably and start doing something about it, the practical implementation is not that hard. For example, reduce the available funds for new student loans with 1/10 every year, meaning that no new loans are issued after year ten. This gives both current students and colleges ten years to adjust to the new reality in an orderly fashion. A ten year transition also allows private financial institutions to fill the void left by the government. Because the market for student loans will not go away, only shift to focusing more on financing degrees with a good return on investment. For some degrees with less tangible value, college endowments and charitable organizations may provide financial assistance, while others will most likely disappear.

Finally, require current borrowers to pay off their loans according to the terms they’ve agreed to (without forgiveness). If you are passionate about cancelling student loans, take matters in your own hands without individual rights violating government involvement: start a non-profit, raise money, and throw a lifesaver to those drowning in debt by assisting them with their loan payments. I promise you a real sense of accomplishment that you would never get from immorally delegating this task to the government.