Saturday, October 29, 2011

Indebting Your Future: Are Student Loans Good?

A student loan is the first pleasurable experience of young people introducing them the perilous idea that debt is good. Debt allows you to buy things. Debt makes it possible to live beyond your means. But debts must be paid back sooner or later. I see students loans more as an investment rather than an expense. If I learn anything from the Finance classes during my MBA, should the future discounted cash inflows be greater than the costs, it is a good investment. With student loans it used to be the case, and that´s why we have seen the rampant growth of all kinds of academic institutions giving away degrees left and right, but the picture is changing. As The Economist reports,
All over the world student indebtedness is causing problems—witness this month’s violent protests in Chile (see article). In Britain, according to a recent parliamentary report, rising university fees mean that student debt is likely to treble to £70 billion by 2015. But, partly because higher education there is so expensive, the scale of the problem is far greater in America. When the next official estimates of outstanding student debt there are published, it is expected to be close to $1 trillion, higher than credit-card borrowing (see article). Credit quality in other classes of consumer debt has been improving; delinquency rates on student loans are rising.
Should delinquency rates continue growing, very soon the financial institutions will (1) pump up the interest rates and (2) severely curb the eligible pool of loan applicants. The history will make a loop, education will become once again the privilege of the few and its prestige will go up. The debate whether education should be for all or just for a smaller fraction of the society has been going on for ever. There are those who believe that for the well-being of the society education should be given to all those who ask for it. The Soviet Union was a good example of this: the country was boasting some 98% literacy rates but it was a challenge to find a good plumber while the economists and teachers abounded. There is a second group who opine that education should be elitist and be granted to people solely on the basis of their merit. This point of view is based on the premise that a good technician is better than a mediocre philosopher and I tend to agree with this approach more. Admitting mediocre students academic institutions impede the learning process for the bright and gifted: it is a vicious circle, and at the end of the process all will emerge with the same piece of paper certifying their academic status.

I started speaking of this to prove a point that once we limit the ability of just anyone to enter higher academic institutions, the student loans will once again play the role they are supposed to: assisting those who will use their diplomas to multiply wealth, and not merely drift through the college years and emerge in the labor market with a skill set fit for a telephone operator.

We can also talk about the role of the business in all this. Spotting talent and helping it develop should be today's companies priority. Clawback clauses or not, but big organizations should help the gifted and deserving to augment their knowledge as they will be entering the labor market in four to five years. When companies talk about CSR, they often talk about hugging the pandas and planting trees. Helping promising youngsters get to where they want to be in terms of their academic and career aspirations is a CSR missions as important: it is doing the right thing and the smart thing at the same time. Very soon they will lead your companies.

So yes, debt is good. You can do more with other people's money. I don't blame those who have indebted themselves to the point of no return; I blame the banks and other financial institutions who made it possible. You cannot reproach people grown up in a society encouraging borrowing, it's part of your culture - what can you do about it? But giving credits and loans left and right for those who know something more about economics and finance than 17-18 year olds is at least irresponsible and morally questionable.

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