To begin, if you really want to read up on this issue you should head over to the Forgive Student Loan Debt website – tons of information over there on the idea and concept. More recently, the New York Times commented on the concept of forgiving debt in a commentary posted to their website, which you can access by clicking here. The New York Times piece makes a good point about the downside of forgiving debt, in general, when it suggests:

To start, writing off debts would not necessarily increase economic growth. Every liability is also an asset, so while a dollar that is no longer required for debt repayment might add some cents to consumer spending, it is also a dollar cut out of a bank’s capital or of an investor’s net worth — subtracting from resources and confidence.

And write-offs big enough to change consumer behavior would probably be big enough to destabilize banks. The Federal Reserve or the government would need to help, presumably by injecting newly printed money as capital. Such government control is usually inefficient, and abundant printing of money increases the risk of uncontrolled inflation, which has its own way of making people feel poorer.

The issue of moral hazard also cannot be ignored. Much of the excess debt was incurred through irresponsible mortgage refinancing, which peaked in 2006 at $322 billion, representing 2.4 percent of G.D.P. The reckless use of houses as A.T.M.’s was a major factor in decapitalizing and destabilizing the American economy. Forgiving such debts will teach the wrong lesson: borrow in haste, repent never.

Okay. They’re right. I get it. Makes sense. But what about student loan debt? Does forgiving student loan debt make any difference in this equation? I think so.

Sure, I agree with the New York Times about the moral hazard issue and I would hate to see folks incur massive amounts of debt only to discharge that debt via bankruptcy a year after graduating. That wouldn’t be right. However, I would like to see a system that allows for some level of forgiveness for student loan debt after a certain period, time spent working at a certain job, or some other logical qualifier. The federal government has a program that like that right now where after working for a nonprofit organization or for the government for ten years, the balance of your student loan can be forgiven (the program is so much more complicated than that, but you can look it up if you want to know more about it).

Megan McArdle wrote a very good article in The Atlantic the other day about this issue. I think that my point of view is very much in like with Ms. McArdle’s thoughts. In her article, she writes:

By allowing students to shift forward the additional income that their degree will earn them, student loans have allowed universities to capture a huge portion of that future income stream–which really hurts those for whom that stream doesn’t materialize. Moreover, it allows students to make the sort of stupid choices that most 19-year-olds will make if they’re allowed. I don’t have a lot of patience for university administrators claiming that they just can’t possibly charge less than $25,000 for 15 hours a week worth of classes, but they do have one point: they build expensive new facilities and load on the services because students demand them, and threaten to go elsewhere if they can’t get them. Colleges look ever-more like four year resorts with a sideline in academic research.

If students actually had to earn the money to pay for that world-class fitness center, the 2,000 different clubs, and the off-campus apartment with the pizza parties, there would be a lot less of those things. And while I like both world class fitness centers, and apartments, they’re not the sort of thing that should be funded with borrowed money. If the degree caused pain now rather than pain later, they might also think harder about whether what they were studying was likely to deliver a solid return on that investment. I’m not faulting the students–the future is a pretty hazy concept when you’re eighteen. I’m just arguing that it’s not necessarily helping to enable them.

For me, this is the crux of the issue. I’ve been saying for a while that I really don’t like the social system we’ve built in this nation where we tell young people that their ideal life is to do well in high school, immediately go to college, and then begin working for the next 35 – 40 years of their lives. That’s not conducive to the type of futuristic, 21st Century society that we should be building. Yet, we’ve not only created this social ideal, but we’ve found a way to fund it in a manner that allows colleges and universities to make a ton of money! That’s not conducive to many things including increasing the value of a college degree in the workplace (which colleges should be concerned about) and increasing college graduates’ personal wealth (which all college graduates and their families should be concerned about). So, as the folks at the Forgive Student Loan Debt website can tell you – the system is clearly broken.

I’m not the type of person to throw the baby out with the bathwater, though. And it is in that mindset that I believe we shouldn’t forgive 100% of student loan debt. Instead, we need to fundamentally change the system for both current borrowers and future borrowers. For example, to address the concerns of those borrowers who currently have outstanding student loans and are struggling to repay them, we need to create truly flexible repayment programs. In other words, we don’t need to capitalize interest on loans that are in deferment – we need to eliminate the interest on those loans, period. For a private banker, that’s the epitome of a risky loan so I understand that this type of recommendation will likely create a culture shock at the local bank. However, if I’m the guy who runs the local bank, I’m more concerned about having my principal repaid – even if it’s over time – than having a loan go into default because the total burden was too much for the borrower.

And on the same note, if banks continue to want to fund student loans, then they need to do better underwriting to make sure that the person who takes out the loan can repay it once the time comes for repayment. But that’s a topic for another post entirely.

For future borrowers, I’d be in favor of a graduated borrowing schedule and a total student loan cap. I don’t know what number would work or what the system would look like in its final form, but I don’t see why we couldn’t form a program where students are allowed to borrow (for example) up to $10,000 during their Freshman year, $8,000 during their Sophomore year, $5,000 during their Junior year, and then $3,000 during their Senior year. In total, that’s $26,000 worth of student loan debt (which should also have flexible repayment options and a very low interest rate). Repaying that amount of student loan debt is totally reasonable. Plus, a graduated debt schedule might entice students who do not currently work to get a part-time job (or two) while in school. It would also encourage students to think twice about those stupid choices that Ms. McArdle references above.

What it comes down to is education about the system. In the current system or in a revised system, more people just need to understand the entire student loan industry before they choose to take out those loans. And I think we’d be hard pressed to try to force all of the knowledge into the heads of young people. Instead, we need to be sure that the parents and guardians are more aware of what the implications of these students loans are in the long-term and hope that they educate their kids about the possible outcomes. There are always going to be outlier situations, of course, where some folks get themselves in very deep debt. But if we – as a society – understand the issue better, we might be able to find a reasonable way out of this hole.

For me, though, I’m in favor of some form of forgiveness of student loan debt. I’d probably focus on eliminating the capitalized fees, interest, and penalties from the student loan balance first. Then, I’d try to encourage the expansion of the debt forgiveness program I referenced above. Again, we don’t need to eliminate the entire system – we just need to recognize that it is broken and begin working to really fix it – right now.

But for everyone else, this year’s giving season is an exercise in a different sort of asset allocation than the one we’re used to for our retirement accounts. It’s about competing demands, the rising need to pay for basic human services in our communities versus the emotional pull from the educational institutions that helped shape us.

I used this quote from the article to highlight the last sentence regarding how we are shaped by our educational institutions. I hear this line from my undergraduate institution, my graduate institution, and my fraternity time and time again and frankly, it’s insulting. I’m sure that there are some people in the population who go to college as chunks of clay and who are then shaped into whatever artwork their professors can manage, but how prevalent is this type of person in society? I know many more alumni from my undergraduate institution who can’t stand the college than who adore it and thank it for making them who they are today.

In fact, the comment that I hear most often from my fellow alumni is that the school was too expensive to attend and that one or two overbearing professors really left a negative mark on some students. In fact, it gets a little humorous to hear how one or two of the English professors are out of line (and out of the times) with their stance towards educating college students and how their methods are not replicated in the working world at all. Stupid professors…

Plus, what ever happened to the idea of students being their own people and bringing something new to the university? Why is it that some people think these universities and organizations shape individuals? Isn’t it the opposite? Don’t the individuals shape the climate and the culture of the organization? Anyway, the following text is also from the article:

The Amherst endowment, which stood at $1.7 billion at the end of June, lost about a quarter of its value over the next four months. The families of its students suddenly need more financial aid because of the economic downturn. And now the college is turning to its alumni for help, at the very moment that many of them are experiencing their own catastrophic financial losses.

Again, I focus on that last sentence with respect to my experiences with my undergraduate alma mater. At some point in November I received the annual phone call from a Freshman at my old college asking me to donate. The new strategy for these solicitations is to have you talk a little bit about your time as an undergrad and give your suggestions to the student on the phone about how he or she can make the best of their time on campus. It’s all an effort to get you to donate to the university – nothing more, nothing less. Well, after about thirty seconds of my babbling about undergraduate life to a Freshman who wasn’t listening anyway, the girl made the “ask.”

If you haven’t been solicited by the telephone before, the “ask” is when the person on the other end of the phone gets to the point in the script where they need to ask you for a donation. They usually start out high and are willing to go as low as they need to go in order for you to say “yes” to their request. This girl asked me to donate $1,000. I almost fell on the floor! Go back and read the last sentence quoted above – alumni are feeling the financial crunch, too! How dare my undergraduate institution (where I paid nearly $100,000 in tuition) ask me to donate $1,000 in this economic climate!? I told the girl that I was offended by the number and that if the university knew about my current status (which they SHOULD know about – I teach there), then they’d know that the number was out of my range. So she asked me for $500 and I told her that I wasn’t going to donate anything and thanked her for her time.

Up until now, I haven’t asked to be taken off of the solicitation list from my alma mater because I wanted to get the phone call and to consider an annual donation to a cause of my choosing (as stated in the article). However, after the ridiculous ask by the college this year I think I’m going to request to be taken off of their annual solicitation list. I donate my money to the Sigma Pi Educational Foundation not because the fraternity “shaped me” in anyway (it did not), but because I know where the money goes and I see the end result with my own two eyes. I would encourage all of you to do the same in terms of researching and understanding where your scarce donation dollars are being spent.