Like many others wishing to take advantage of pandemic-induced low interest rates, I refinanced my home in 2021. I remember holding my breath while my lender checked appraisals to be sure that the value of my house was enough greater than the loan I was seeking that I could avoid paying mortgage insurance. In my previous mortgage, I had been paying for the insurance because, as a first-time homebuyer, I was not able to make a large enough down payment to increase the gap between the values of the home and the loan.
Each time I applied for a mortgage, my lender explained to me these policies, and I depended on their expertise to help guide my home-buying decision. I knew what homes I could afford to buy because the lender, trained in risk assessment and committed to protecting their own interest in the deal, would not loan me more than the value of the investment I was making with the loan.
I did not have to be an expert in housing markets to buy a house. As long as I was working with experts, and as long as we were all behaving in our own self-interest, I could trust the market to provide signals and boundaries – loan, loan with insurance, or no loan – that would inform my own, self-interested choices. (This is assuming we don’t have another 2007, but that’s for another column, and you get my point.)
The market for student loans does not work this way. In 2009-2010, I was one of the 141,720 recipients of a student loan in the University System of Georgia. I logged into my account on the school financial aid portal, clicked a few buttons, and I had a loan large enough to cover my tuition and fees and room and board for an entire semester. As long as I remained enrolled and made progress toward my degree, the loans kept coming.
Unlike with my mortgage, no one asked questions about my expected ability to repay the loans. The amount of the loan I qualified for was based on one thing only: what I was paying to attend school. Unlike in virtually every other loan market, education loans are granted without regard for the applicant’s expected ability to repay. There is a universal assumption that higher education is an investment that will always pay for itself.
It’s true the returns to the investment of higher education are positive almost across the board. But, the magnitude of the returns differs by location, field of study, individual ability, etc. Financial institutions are irresponsible not to consider these differences when issuing loans.
This is why in my last column I agreed with those who say Biden’s student loan forgiveness plan is not fair. I don’t mean that I wish student loan forgiveness were not happening for some. What I mean is that it should not need to happen because we should never have let so many people go into such great debt for education. This includes a lot of folks who have already paid off their education debts and who, unfairly, will never get back the money they should never have had to shell out.
Many on the “it’s not fair” side of the current policy debate are pointing fingers at the borrowers, saying they made their bed of debt and should continue to lie in it. I say that characterization itself is unfair. In other loan markets, we trust financial institutions to assess the value and potential returns of our investments and to loan accordingly.
What is not fair is that we expect college students, many of them teenagers and young adults, to be able to do for themselves what consumers are not expected to do in any other loanable funds market – fully assess their own default risk and make choices about their investment in education without the typical guidance from the market.
In my next column or two, I will write about two possible long-term policy solutions to our student debt problem: 1) return student loans to the private market, or 2) fully publicly fund higher education. These two options are on opposite ends of a spectrum, but I hope to demonstrate that either extreme would be better than the muddled middle in which we currently operate.
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Dr. Melissa Trussell is a professor in the School of Business and Public Management at College of Coastal Georgia who works with the college’s Reg Murphy Center for Economic and Policy Studies. Contact her at mtrussell@ccga.edu.
Reg Murphy Center