Guest Post by Alan Collinge
Group Founder Alan Collinge has written numerous articles, and editorials on the topic, and also published The Student Loan Scam in 2009. He was selected as one of seven “Financial Heroes” by CNN/Money Magazine in December 2008.
There has been a disturbing coalescence of papers, positions, and proposals coming from Stanford graduates, academics, and Silicon Valley tycoons regarding student loans recently. All of these have, unfortunately failed to address the relevant economic dynamics governing the lending system, and their proposed solutions either completely neglect the $1.3 Trillion dollar problem at hand, or even defend the Public Policies that gave rise to it. Whether by chance, design, or otherwise, these proposals, collectively, are badly distracting the public discourse, and perpetuating a problem that is simply false.
It started with a paper by G. Marcus Cole, Stanford professor, who argues that because student loans are unsecured, there should be no bankruptcy protections for them. Coles is quoted in the Stanford Law School News:
“…With dischargeable loans, the risk that lenders would not receive the money they originally lent would increase. Cole added that investors wouldn’t see the sense in lending to students anymore.”
Cole completely fails to acknowledge that both private banks and the federal government administer unsecured loans, many of which are very profitable (for instance, the credit card industry). Cole also fails to acknowledge that in the absence of bankruptcy protections, a lending system has come about where every element in the chain, up to and including the federal government makes more money on defaulted loans than loans that remain in good stead! This is a defining hallmark of a predatory lending system, and Adam Smith himself would agree is an unfair, intolerable, and unacceptable lending relationship. Would Cole argue similarly that medical debt, credit cards, and other unsecured credit be non-dischargeable?
Cole also completely fails to acknowledge that in the run-up to the 2005 bankruptcy bill- which stripped bankruptcy from private loans- the lenders promised they’d lend to needier students , but this has never happened. What the lenders DID do was begin requiring creditworthy cosigners for virtually all private loans, and now use this to extort vast sums from parents and grandparents under the threat of losing their savings, retirement, real property, etc. That Cole, or any economist would attempt to defend such a blatantly dirty trick and all the havoc it has wrought on so many families is, frankly, unconscionable.
The second attempt to address the student debt problem comes from Mr. Peter Thiel, Stanford Grad, Paypal Founder, and Manhattan Dandy who is essentially using the $1 Trillion student loan crisis as a stepping-stone by arguing that kids-particularly disadvantaged; inner-city kids- should forgo college and instead pursue entrepreneurship. Never mind that Mr. Thiel would never have snagged the success he now enjoys were it not for his Palo Alto pedigree. Never mind that a recent job-posting for Thiels investment company was very clear that only well credentialed with applicants with advanced degrees would be considered for employment. Never mind that this is typically horrible advice for young people who aren’t knowledgeable, skilled, and passionate about a potentially marketable product or service- particularly kids who weren’t lucky enough to be born into the kind of wealth and resources that Mr. Thiel was born.
Most recently, Mr. Mark Cuban, Dotcom Billionaire, Dallas Mavericks owner, television celebrity, and yes- Stanford alum, has calledfor a 10% reduction in lending limits to undergrads. Cuban, like the others, completely fails to acknowledge the root causes of the out-of-control inflationary spiral the student loan system is now on. As such, his solution does absolutely nothing to cure the root causes of the problem, does nothing to address the massive injustices and harms now being inflicted on the citizenry- many of them Dallas Mavericks fans, and only perpetuates the true “shark tank” mentality that has overtaken this industry, and the big-government behemoth that oversees it (scroll down the link to get the punch line).
While these men don’t necessarily represent the prevailing attitudes of the “Stanford Crowd”, I’d say their comments reveal stunning ignorance of the problem(at best), or an agenda to perpetuate/exacerbate a predatory lending system that has inflicted massive harms on tens of millions of citizens, and is poised to wreak a far greater havoc imminently. This reflects poorly on the university. I hope very much that the economics faculty there will have the courage to step up and inform the discussion up there.