“Which of the following statements about federal student loans is true?”. This is a question we received in a portfolio consultation last week with a prospective client who also happens to be just out of college.
You see, this individual wants to get involved in the markets, compound the earnings of his profits over decades, and be able to manage his money himself. We applaud everyone like this, in fact, we hate Wall Street and believe everyone can manage their money and be very successful in doing so.
The reality is that student loans, however valuable they are perceived to be, cause significant damage to not only a majority of the individuals who get them but also for the broad overall economy. Here we go…our answer to the question “Which of the following statements about federal student loans is true?”
Here is the scenario. You graduate high school. Your parents and most of the people you know that are older than you went to college and they all have jobs. So you think (rightfully so) that the next move in your life would be to attend college in hopes of attaining higher educations, getting a quality degrees, and set yourself up for success in the job market.
So you get accepted to a school that is $40,000 a year, and you cannot pay for that. Have no fear tho! The government will give a loan of any size to anyone who wants them.
Then what happens? Your second year at the university, tuition goes up to $43,000. And why does it go up? Because colleges are there to make money and not educate. They are there to admit people who are paying tuition and do high enough quality research to get federal funding and grants. But wouldn’t colleges not raise their tuition prices if people couldn’t afford the new prices?
Of course, they wouldn’t. Universities know that the government will give any size loan to anyone who wants it. Tuition prices continue to go higher because the universities know that tuition prices are very much backed by the government. The universities get the money from the loan providers, and the students are stuck with all the nasty baggage.
So why do tuition prices go up higher than something like inflation? Because these universities know that as long as the government is there to guarantee these loans, they have absolutely no downside in raising tuition prices. They can and will continue t do this as long as the government is handing out student loans like it is going out of style.
Then What Happens
Then you are in debt until you are 40. Interest rates on student loans go higher each year because there are more and more defaults. Remember, these loan providers (the government) are in this to make money too. So the more former students default on their loans, the higher the interest rates will be for everyone else. Right now, according to ZeroHedge, there are about $137,000,000,000 in default loans right now. Tragic.
Which of the Following Statements About Federal Student Loans is True?
Here is the scenario right now.
Tuition prices continue to go higher. Why? Because universities know the government will continue to give loans of any amount to anyone.
As the same time, because tuition continues to increase, the loan providers must increase the interest rates to stay in business (as defaults go higher so does the interest).
So to answer the question “which of the following statements about federal student loans is true?” is pretty simple. What is true is that if the government continues to give a loan for tuition to anyone who wants it, the interest on those loans will continue to increase making the default numbers increase each year. This is a bubble that one day will ultimately pop and explode.