(Confidential Draft Excerpt from Intelligence Hath No Party)
The Student Loan Crisis:
Subtly Compelling the Transfer of Deferred Income (or, pick on someone your own size)
A reckoning is on the horizon. This is not a politically driven sensationalistic view, but an observation rooted in the historical consequences of systemic and forced labor and wealth transfers from a vulnerable and extremely influenceable (or controllable) group to an established, powerful, well-funded, authoritarian party.
It can be seen now but is still being ignored by most. The reckoning I'm referring to here, though there are others, is the rising student debt load of the past two decades. Recently student debt levels have become an increasingly hot topic in political circles. The issue is quickly becoming a two-sided debate based on false narratives—one side of the aisle argues exclusively for debt forgiveness while the other argues exclusively for personal responsibility. Though my aim is to take neither side, I will likely give each side the opportunity to take offense. I explain the complexity and nuance of this situation, as well as the dangers if we lose thoughtfulness.
This is not a technical paper. Rather, it is based on logic and common observation. I will not try to "prove" my points with studies. My argument is based on problems surrounding most "studies" as well as recent thinking around higher education—the fatal flaws that got us here. If you have already chosen your side, you are unlikely to be persuaded by this paper.
I do not claim to be an educational authority. What I know—my arena—is financial markets; capital allocation and financial mathematics (calculus and statistics). I operate in markets where the feedback loop is continuous and filled with noise. One must determine what matters and what doesn’t. Public sentiment, beginning with good intentions, is often filled with biases and faulty premises (leading to “noise” or false signals). Markets teach us that sometimes what everyone believes, and where the data points, is blatantly ridiculous. The belief is founded on certain data, some result which is itself noise. The most dangerous noise are false signals—when data is misinterpreted as meaningful; when a trend is expected to continue solely because it has kept on up to that point; when calm waters are taken to mean fallible men have finally eradicated storms.
Capital misallocation leads to innumerable false signals. Consequences are the result of nth order effects and cannot possibly be known ex-ante. Decisions made by government officials and those scholarly gentlemen in ivory towers, albeit with good intentions (and maybe a spoonful of self-interest), contain within them higher order consequences—what some might call unintended consequences or side effects. Things that occur beyond the desired effect. It doesn’t matter how they are labeled to those in their eventual path. The harm caused is the same. They are simply consequences, unintended or not. The student loan situation in the U.S. is fundamentally a problem of capital misallocation. The desired result was mass education. The higher order effect has been mass enslavement, then bitterness and resentment. What comes next we will soon find out.
Encouraging young people, with little practical acumen and their entire lives in front of them, to take on large debts for the purpose of gaining a degree in any field is tantamount to stealing. That is, without adequate consideration of the probable financial and life consequences—the probability and severity of the decision.
It is nothing more than a forced wealth transfer. Students, most often between the ages of 18 and 21, are encouraged to take on levels of debt at a point in their lives when they cannot understand the mental, emotional, or financial consequences of such burdens. The university system has trained itself to simply accept that “this is the way things are” seemingly without much thought as to the effect this will have on many of their students.
Previously, before the mid-1990s, education was significantly more affordable and reasonably valued. University and government researchers looked at the data and found that people who went to college were doing better in life. They had better incomes, committed far less crime, divorced less, and lived in wealthier neighborhoods. This is where the crucial mistake occurred.
Analyzing the data, researchers with inadequate statistical understanding, assumed that because people who went to college did better in life then the way to get more people to do better was to get them to go to college. It didn’t work. It wasn’t that going to college made people better. It was that people who took the initiative to go to college were already likely to do better. Going to college was, from the 1960s to 1990s, simply the route chosen by many who were already on a good path. Forcing people to go to college doesn’t automatically make them better any more than forcing an alcoholic to go to rehab guarantees he won’t relapse.
College became the default cultural choice for many sections of American society. It was taboo to not attend. Not long after, loans to pay for undergraduate degrees became readily available. This is when costs began to grow at ridiculous annual rates.
Today, college degrees—both undergraduate and graduate—are entered into indiscriminately, which is what one might expect when young people are encouraged to “follow their passions” with what feels to them like unlimited lines of credit. Of course, they feel not burden in the moment (hyperbolic discounting). That will come later.
Where it makes sense
There are of course exceptions, situations where the original benefit of university education abides. Certain fields require advanced and sometimes expensive education—fields like medicine, mathematics, and computer science. In such cases, where there is a strong probability of a higher income sufficient to service the debt without creating unreasonable financial burden, student loans can be a good decision. Not that they are always a good decision, but the chance of financial ruin in greatly diminished by the level of future earnings.
Further, at risk of putting more pressure on kids to get into “the right school”, there is a benefit to attending prominent, highly respected schools in both education and network. I observed this firsthand when hiring students from top-ranked schools vs. those ranked outside the top 50 or 100. The latter were more often than not improperly trained (in finance and financial analysis in our case) and had to be re-trained on the job. Those coming from better schools with lower acceptance rates and higher standards for graduation were, in our experience, competent in fundamental areas and first principles. This is not to say there were no entry-level hires from average schools with adequate knowledge. Only that, as a heuristic, the hit rate was unquestionably higher with hires coming form the higher rated schools. I understand this claim is anecdotal, but to me it also seems obvious. It is reasonable to assume recent graduates from prominent universities hold a much higher probability of (1) adding value, (2) faster growth in contribution, and (3) being perceived in a positive light both internally and externally.
Further items to consider:
1) Artificial and unhealthy supply and demand signals.
2) Ignorance of resource (human and financial capital) allocation.
3) Unnecessary Societal burdens.
We generally do not give much thought to what doesn’t impact our lives. In many areas, we do not give all that much thought event to what does.
4) Hasty extrapolation of previous conditions.
The unfortunate truth is that many, and I would argue most, parents of students have either (a) too hastily accepted the pressure to attend, and thereby avoid certain taboos of being “uneducated”, or (b) have given no thought to cost vs. benefit consequences to themselves and their children.
Forgiveness. The most obvious problem being the palpable inequity of punishing the prudent. Assume you have two people with equivalent degree, job, income, and student loans. The only difference is that one lives like a popper to pay down student loans while the other chooses a more comfortable lifestyle today and pays the minimum to student loans.
Responsibility. The statement “life isn't fair” is not applied equally to all circumstances. We do not assume someone stealing your wallet is the same as if you lose your wallet. We also provide many more protections to children and minors. They are more vulnerable, more susceptible to being taken advantage of. It’s for good reason then that society places controls around what children can hear, see, consume, and how they can and cannot be treated. We define a minor as being under the age of 18 because lawmakers had to draw the line somewhere. But this designation was put into place before we understood how much neurological development occurs between 18 and 25. While an 18 year-old may appear physically developed on the outside, his prefrontal cortex, and hence ability to critically process information, will continue developing for another six to eight years.
Skin in the game. University resources (i.e. cash flows, endowment funds) should be linked to, at minimum, average student outcomes for a given degree. That is, not necessarily each student individually, but the average for [insert degree or area of study] (e.g. art history, early childhood education).
 For example, they could run a regression analysis, understand the problems with correlation, read a financial statement, etc. They had better knowledge of important historical dates and events.