Anatomy of Today’s Student Loan Debt and Other Failed Socialist Policies

Stock Talk School: Anatomy of Today’s Student Loan Debt and Other Failed Socialist Policies. CIO Chris Perras takes a break from his usual stock market commentary to tackle a real-time example of how well-intentioned but ill-conceived policies can cause financial harm.

Chris Perras: Hey there, my name is Chris Perras. I’m the Chief Investment Officer at Oak Harvest Financial Group in Houston, Texas. Welcome to the February 14th, 2020 edition of our weekly Stock Talk Podcast: Keeping You Connected to Your Money. As of this recording, the stock markets are sitting near 3,375 on the S&P 500. That’s near an all-time high. This will be the first podcast of the year that I want to digress from my normal stock market and economic commentary.

I’ve done this in the past during times when we really don’t have a lot new to talk about when things in the market played out as we thought. I do this in order to address topics such as politics and their effect on stocks or to educate my listeners as to the drivers of total stock market returns.

Today, I want to address an ongoing topic in the financial press and one currently running around political circles. This topic, I’m going to title The Anatomy of More Failed Socialist Policies, Today’s Student Loan Debt Crisis. Why do I want to do this now? Mainly because this topic is a real-time example of how badly ill-conceived socialist economic principles and policies can spiral out of control and costs both its direct participants, as well as those innocent bystanders horrible financial harm.

According to The Wall Street Journal, borrowers currently owe more than 1.5 trillion with a T, in student loans. Over two million borrowers have defaulted on their loans since 2013. The federal government, never known for its accuracy and forecasting budgets, under former President Obama forecasted big profits from the direct student lending market. Now those government agencies are saying taxpayers will lose at least $31.5 billion over the next 10 years.

According to a CNBC article written just this week, nearly 30% of borrowers are in delinquency or default on their student loans. Five years out of school, only one-half of people with student debt have paid even $1 towards their principal, according to the US Department of Education. How did we get here? What started out in the 1960s as a belief that higher education was a safe and worthy investment for both individuals and society as a whole, turned quickly into a socialist government-run taxpayer backstopped giveaway with little economic rationale or ongoing quality controls.

The Higher Education Act of 1972 made our federal government and thereby made you the taxpayer, the ultimate guarantor of student loans. Ultimately, the combination of open access to any and all schools, regardless of a student’s major of studies, or their employability upon graduation, or regardless of one’s future ability to pay off these loans, turned paying for college into the second coming of the savings and loan crisis of the 1970s.

The system’s incentives gave colleges the reason to maximize tuition and fees, as well as student enrollments by lowering student admission standards. Far from exclusionary, your political representative didn’t want to place any academic criteria or standards on the system in fear of looking biased. On the back of these, including all programs, college tuition costs have soared almost 1,400% since the late 1970s. That’s more than four times the rate of overall inflation.

Somewhere the idea that anyone who wanted to go to college should be able to emerge in political circles. This sounds to me a little bit like college is an inalienable right. Does this phrase sound familiar to anyone out there, any of my listeners? To me, it sounds a lot like the current declaration by liberal presidential candidates that access to healthcare is a human right.

Listeners, tell my wife that, who’s a doctor, or anyone else who went to school for 13 years to become a doctor and is actually practicing medicine that and then let me know how they respond. I mean, Mr. Bloomberg, you are a great businessman, but I’m a financial professional, and I really need your Bloomberg service terminal, but it’s priced at $28,500 per year and I can’t afford it. Why isn’t it my right to have your service provided to me at a discount? I mean, it really is unfair that other financial professionals out there can afford this insanely high price, the price to that, made yourself billions in profits and I can’t afford it. Please answer me that.

It sounds familiar to me. Healthcare service as a god-given right? It’s one of the most absurd concepts I can think of. Restructure the system we have in place, do not attempt to pile on additional services and benefits, and covered it into an already ill-conceived and underfunded system. What could possibly go wrong? Now, with student debt booming, and policies of funding for college for all, just like we did for subprime housing, we know what? Could and will go wrong.

Let’s start with the rocket scientists in government who didn’t even factor in a student dropout rate into the student lending program. Why would we do that? We’re at the age of everyone gets a medal. There are no losers out there. If that’s the case, why would you ever think someone couldn’t hack for years in engineering, math, or science at a major college? Hell, we never make mistakes in our admissions department. I’m sure we get things right 100% of the time. Not.

I admit the Obama administration did try to address many of the program’s problems by adding regulation to the equation. He put in place rules for for-profit schools, whose share of the federal financial aid nearly doubled between 1996 and 2012 if their students defaulted too much. That was a great first step. Unfortunately, this was a visible but small part of the market, amounting to about 15% of all government aid, and President Obama went ahead and double down on the idea that every American needs to get more than a high school diploma.

What did he do? Well, he scrapped any possible free-market constraints on the program by enacting a wholesale shutdown of the efficient, guaranteed student loan program that had been in place for almost 40 years. He replaced it with federal government don’t ask what, why tell lending. To put a cherry on top of the socialist-style giveaway programs, President Obama pushed income-based repayment programs, which set borrowers’ monthly payments at, get this, 10% of discretionary income. Yes, discretionary income, not based on gross, not on base, discretionary income, regardless of what major the student studied, or regardless of how much it cost. What could go wrong?

We now have graduates like Sadie nurse, who doesn’t see why she needs to repay her $120,000 in student debt because, and I quote here from that same CNBC article, this is her, I was, “Just trying to improve my understanding of the world.” She follows up with this ludicrous statement. “It’s a way not to look at ourselves as failures because we’re failing to pay back an excessive amount of money for knowledge.”

Here’s another quote from one Aimee Schneider, who attended but seems to never have graduated, the Illinois Art Institute for three years in 2007 through 2010, “I never benefited from my degree, so if I repaid my student loans, I would be legitimizing fraud.” Ugh. You are kidding me. Does she actually believe this? These people bear zero responsibility for borrowing money to go to college, or for studying subjects that have little to no economic value in today’s economic society? You have to be a diehard socialist to actually believe this.

Think about that. Similar unsecured debt the consumers take on that requires flexible consumer payments at a discretionary rate, include things like personal debt and credit cards, and credit cards charge interest rates of 20% to 25% per year. Because there is usually no collateral in a student loan, the remedy of repossession doesn’t exist. This means failure to repay a student loan will require legal action that can ultimately result in a lawsuit and possibly of having a judgment rendered against the consumer, including garnishment of wages. Who’s going to sue you? The federal government that unabashedly loaned you money without regard to whether you could pay it back? What could possibly go wrong?

Go to school, study subject matter that has low economic value upon graduation, get a job paying a low wage because no one valued your left-handed prime number general studies degree from your state school or heaven forbid, a private school that costs three times as much and then try to figure out how to pay back the loans you were given by the federal government because the politicians and educators convinced you that a college degree was your golden ticket without mentioning costs to return on investment. The more I ponder has similar the story sounds to the housing bubble of the 1990s or 2000. Homeownership is the American dream, isn’t it? No one ever loses money buying a home, do they? Right. Isn’t homeownership an American right? Everyone should own a home so let’s lower lending standards without compensating the markets for the additional risk to extend the market to everyone. What could possibly go wrong? Ugh.

With these things in mind several liberal democrats now endorse either a system of free college or canceling up to half of the nation’s outstanding student debt. Apparently, these people not only ignore every failed socialist state in major populations around the world the last 100 years but even worse, they haven’t studied even our own recent history of failed socialist-leaning programs in the US. Hell, what could possibly go wrong with these new socialist ideas? The student debt crisis is one rooted in well-intended, horribly crafted policies pushed on us by politicians stretching for votes, trying to help out a subsector of the population.

They do this without fully accounting for the ripple effects that these policies have on the rest of the consumers of these products. Bring it out. If your investment adviser has been following the herd selling stocks when they were down last summer on tariff concerns or maybe selling stocks out of your portfolio more recently because someone was bullied into calling the coronavirus a “game-changer,” on Sunday night in front of the Super Bowl, give us a call at 281-822-1350, we have a better way we are here to help you on your way to retiring and staying retired with a customized retirement planning. This is Chris Perras with Oak Harvest.

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