To Mark Cuban on Student Loans: Grab some Bench, “Rookie”
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.
I have come to hate the word “entrepreneur,” and would be happy to use my cat’s water pistol to get people to stop using it. Squirt squirt!
Entrepreneurship depends on an existing economy to work. It requires a complex economic ecology, in which it can find little nooks and crannies to exploit hitherto uncaptured capital.
But, in a constrained economy, where uncaptured capital doesn’t really exist, a swarm of entrepreneurs trying to live in the grass roots simply clog up the roots, if they succeed, or reduce collective wellbeing by edging in to feed at an already crowded source. They can reduce the income of existing, often marginal businesses by undercutting them, overpopulating the sector, working at a (supposedly temporary) loss until they tire of the attempt and move on to another endeavour. Or they can simply keep trying till their savings are exhausted. Or both.
I have friends who do pet grooming, for instance. It’s a skill that can be done cheaply, if you don’t mind doing it badly, and my friends have seen a swarm of younger people coming into the field — untrained, uninsured, with cheap tools, operating in their own homes for an undeclared addition to their meagre family income. They may work at it for a few months before moving on, but in a tight labour market there are always more gals who “just adore animals” and who try their hand at it. Skilled, insured old timers hang on by their fingernails, or retire early.
Entrepreneurship is just one more facet of what I call shovedown, where the bottom 25-50% get the full burden of supporting themselves and aiding each other, doing the all labour of the economy (paid and mostly unpaid) while still collectively paying the cost of keeping the aerial castles of the 1% afloat.
Nice piece. The problem however is that student loans are a symptom not the disease itself.
The student loan problem reflects the increasing cost of a university education. Those costs have risen for two reasons that are at the heart of a disease that threatens to rend any sort of social contract. First, universities have become profit seeking enterprises with students becoming customers to be fleeced. Second, legislatures have abandoned funding for public goods, state college systems being one of those things that are supposed to be more entrepreneurial (yes, Noni, a word that should be banned unless used ironically).
Our colleges have become co-opted by the perverse ethic that turns everything into a market that must be monetized. Hence they no longer educate but train. Our cult of the market means that we are no longer individuals, citizens, or even people. No, we are consumers designed to monetized and financialized in every aspect of our lives.
The student loan problem is not a financial issue, it is a cultural issue, an issue of whether we, as a society, are committed to the provision of basic public goods or are simply a collection of isolated self-interested economic automatons.
I think Alan would agree with you. Right now he is going to Washington to do battle with the Center for Progress who appear to have abandon student issues.
Alan Great piece! The student loan system has become outdated..it’s broken and has been corrupted by a select few lenders, special interest interest , lobbyist that have basically brought and paid off our President and Congress to continue to make huge profits off our children backs… yes I said our children that before going off to college depended on us as parents to help them make live changing decision.Now that tuition for 4 years most are 5 years if not longer end up with student loan debt the size of a home mortgage! There are fewer and fewer jobs awaiting our graduates who are now defaulting at alarming rates. And on top of this now the same lenders have become the student loan debt collector as well.The $1.2 or some are reporting it’s now $1.3 Trillion student loan debt is growing faster than ever before. I started following this several years ago the student loan debt was $850 Billion in 2011. I now believe that the first step to a solution is the reinstatement of both Federal and Private student loan bankruptcy …..again Alan thank you for this wonderful piece
For those of you who may not know, Anthony Eller writes a blog on student debt also which can be found here: ProjectTuitionReimbursement