I have evaluated the health of financial institutions and the financial sectors they operate in for over 40 years. One thing I have discovered is that lending money is not rocket science. At its core, commercial banking is based on a simple concept of buying and selling money. However, many governments, lending organizations, and regulatory agencies complicate this process.
According to the Federal Reserve Bank of St. Louis, in the last quarter of 2022, of all outstanding business loans from all commercial banks, 1.08% were delinquent. Per the Federal Reserve Bank of New York, as of the second quarter of 2022, a little over 2% of the $1.4 trillion outstanding in auto loans were delinquent. Yet, in the student loan market, totaling around $1.6 trillion, which is not that different from the total size of the auto loan market, an average of 15% is in default at any given time, per the Education Data Initiative.
It should be clear what the problem is – government intervention in the private sector. In the private sector, auto lenders ensure that those they lend have the ability to repay the loan. They are careful because if the borrower defaults, the lender loses.
However, if, tomorrow, the Democratic Party led by Sens. Elizabeth Warren or Bernie Sanders or Representative Alexandra Ocasio Cortes decides that it is not fair that there are Americans and non-Americans without new cars and managed to get government guarantees for auto loans, is there any doubt that there would be a dramatic rise in defaults on car loans?
Those lending the funds couldn’t care less who they lend to because they wouldn’t take the loss on a default. We, as taxpayers, would, if the Democratic Party had its way and wipe out student loans. Of course, “wipe out” is not the right terminology. Most non-government debts don’t get wiped out. They just get transferred to someone else. In the case of government guarantees, it means that someone else is the taxpayer.
The concept of student loans backed by the government is another child of the allegedly compassionate 1960s. Doesn’t it make sense to help the less fortunate obtain funds to pay for college? However, as many philosophers and economists have noted, the greatest charitable act is to help another individual take control of their own life and become accountable for their decisions. Teaching personal responsibility is a parent’s most valuable gift to their kids. Our compassion, our moral compass, has gone awry in America.
What happened to the saying there is no free lunch that I studied in business school? A promise made should be a promise kept. As a kid, I had two paper routes to pay for my first real bicycle. I understood very clearly that I had to make a payment to Western Auto every week if I wanted to keep that bike. To default on that debt never crossed my mind.
As a child growing up in America in the 1960s, today, I look around to find myself seeing where our government is constantly looking for ways to redistribute money from one social class to another, especially the ones it deems marginalized or discriminated against.
However, just as inflation shows that the costs of fiscal irresponsibility cannot be hidden, the costs of teaching our youth that personal responsibility is irrelevant cannot be hidden. It manifests in the destructive behavior we see now. The Wall Street Journal reported that one student loan adviser told him, “I’m seeing them say, ‘I’m going to take out more loans now and go buy GameStop stock with it because it’s going to be forgiven anyway.”
A recent Gallup survey reports, “32% of currently enrolled students pursuing a bachelor’s degree report they have considered withdrawing from their program for a semester or more in the past six months.” Twenty-four percent attribute this to financial reasons; however, seventy-six percent attribute it to “emotional stress.” Give me a break. Stress is not having the money to pay for essentials, such as a roof over your head or food to put on the table.
Of course, the universities love this. What business wouldn’t think that the government subsidizing the purchase of its product is a great idea? According to the American Enterprise Institute, from January 2000 to December 2021, college tuition costs increased by 175%, and college textbook costs increased by 150%. Over the same period, the consumer price index for all items increased 65.5%; prices of cars, household furnishings, and clothing remained relatively unchanged; cellphone services were down 40%, computer software down 71%, and television sets down 97%.
Per Education Data Initiative, the highest default rate – 26.33% – is among arts and humanities majors. Does anyone really think such loans make sense? We need to help our youth who want an education get it. But it must be done prudently. Teaching our young people that they don’t need to repay debts is not a good start. Misguided efforts by liberals to cancel obligations on student loans should be vigorously opposed. Let’s hope our new Secretary of Education understands this.
Prepared by Terry L. Stroud – May 2025
