Mark Cuban: Forgiving Student Loan Debt Would ‘Bail Out the Universities’

graduation 141022084133

Billionaire investor Mark Cuban saw the demise of century-old Sweet Briar College as “just the beginning of the college implosion” last week.  He’s been warning about that implosion for a long time, in addition to turning a skeptical eye toward the inflation of university tuition as easy money surges through the system.

Business Insider relates a particularly interesting observation from Cuban about the peril of deflating the student loan bubble by simply wiping the debt away – an idea understandably popular with many of the young people currently struggling to pay off enormous college loans.  “Forgiving the debt is the worst thing you can do, because all it does is bail out the universities,” said Cuban, arguing that such a measure would lead to a fresh round of big borrowing, and inflated tuition sponges to soak up all that easy money.

He was responding to new initiatives from President Obama to revise federal student loan management, which the President described as a “student aid bill of rights.”

“Anything that causes lenders and service companies to act fairly is a good thing,” Cuban said in a statement to Business Insider about Obama’s plan. “The challenge is that you can’t subsidize or forgive existing debt without very strict rules. Otherwise it allows schools to tell future students not to worry. They too will get some portion forgiven. Which in turn gives the school more leeway to raise tuition.”

Skyrocketing student debt has become a big talking point for Cuban. A few years ago, he even bought the domain, which publishes a live update of how much college loan debt is held by students. The total is just over $1.3 trillion.

This debt ultimately will outweigh most of the potential benefit you’re getting from the college education, Cuban said.

“What you thought you were going to get in quality of life by going to that college,” Cuban said, “you’ve just undermined with the amount of debt you’re taking on.”

Debt, like fire, can be a dangerous instrument. It’s very easy to envision a debt-forgiveness scheme leading to the rolling avalanche of borrowing, soaring tuition, and forgiveness Cuban warns of. A cynic might even think that’s the point of getting government more deeply involved in student loans: establish a dependency stranglehold over young people, whose votes could be purchased in one election after the next by promising to write off some of the insanely high debt they’ve incurred to pay absurdly inflated tuition rates for over-valued diplomas.

Education, like medicine, is one of those products with an emotional component powerful enough to override sober cost/benefit analysis. Many people have a hard time comparison-shopping for education value with the same flinty-eyed focus they would bring to shopping for a car or house. They don’t always compare the expense to likely benefits in a way that could lead them to conclude the expense is excessive compared to quality of life improvements, although that’s exactly what Cuban recommends. This is especially true when parents are arranging higher education for their children.

Why is anyone surprised that dumping a flood of easy money into the education system prompted tuition to soar, leaving students with outrageous debt burdens, as they confront a job market that will make it very difficult for some of them to repay those debts? Why does anyone think this trillion-dollar debt spiral is sustainable? On his blog, Cuban compares the situation to the 2008 financial crisis:

Remember the housing meltdown ? Tough to forget isn’t it. The formula for the housing boom and bust was simple. A lot of easy money being lent to buyers who couldn’t afford the money they were borrowing. That money was then spent on homes with the expectation that the price of the home would go up and it could easily be flipped or refinanced at a profit.  Who cares if you couldn’t afford the loan. As long as prices kept on going up, everyone was happy. And prices kept on going up. And as long as pricing kept on going up real estate agents kept on selling homes and finding money for buyers.

Until the easy money stopped.  When easy money stopped, buyers couldn’t sell. They couldn’t refinance.  First sales slowed, then prices started falling and then the housing bubble burst. Housing prices crashed. We know the rest of the story. We are still mired in the consequences.

Can someone please explain to me how what is happening in higher education is any different?

There are people who do argue it’s different. Some say the fact that student loans don’t involve tangible property, such as real estate, will make a big difference in the fallout if the system collapses – in essence, there will be less financial shrapnel flying around. Some argue that even though the total accumulation of student debt is disturbingly high, it won’t really become a “bubble” in the classic sense because the price of the asset will never become so completely unmoored from its true value, the way we had houses selling for many times what they were truly worth during the housing boom.

The latter case was made in a December article at the Washington Examiner by Joseph Lawler, although the piece contains many reasons to worry about the student debt situation, some of them possibly unintentional. For example, Lawler cites research that argues the lifetime earnings benefit from an advanced degree is actually increasing relative to the cost of tuition, which would be the opposite of a classic “bubble” effect.

However, such a situation is likely to contribute to ever-wider class gaps and “income inequality,” and unlike much of what the Left whines about, this time it really will be an entirely artificial situation created by market-deforming policies: college degrees are required to earn big bucks, but only people with big bucks can afford those wildly inflated college degrees.

Lawler raises the reasonable point that people who incur huge student debt without actually finishing their degree programs suffer the most under rising debt loads. Rising tuition costs, plus a broader earnings gap between those with and without advanced degrees, will turn higher education into a gamble nobody but the wealthy can afford to make. There will come a point where families of modest means simply cannot take the risk that dropouts – due to academic problems, economic downturns, or life crises that make it difficult for the student to continue – could turn massive student debt loan into a financial millstone that crushes them flat.

Also, the information revolution could make some of those super-expensive prestige degrees become sharply less valuable in times to come. On his website Cuban asserts: “As an employer I want the best prepared and qualified employees. I could care less if the source of their education was accredited by a bunch of old men and women who think they know what is best for the world. I want people who can do the job. I want the best and brightest. Not a piece of paper.”

If that becomes a more widespread attitude among employers, a lot of people could find themselves holding extremely expensive “pieces of paper” that suddenly don’t translate into quite as much earnings potential as they hoped.

The Washington Examiner piece mentions, somewhat dismissively, the problem of student loan debt slowing long-term financial growth by “preventing young people from financing other major life goals, such as buying homes or starting families.” If tuition and debt loads keep soaring in an endless spiral, that’s going to become an ever greater problem, especially if personal income growth remains flat.

It is also said that the loss of taxpayer subsidies has driven some tuition rates higher. Do we really have to pause for another lesson in how nothing becomes “cheap” or “free” just because government forces other people to pay for it? We’re heading into troubled times where an increasing amount of discretionary money, from both state and national government, will be consumed by mandatory spending. Tax subsidies will inevitably dry up. Far better to deal with that now, and get tuition rates under control, before we end up pinned to the mat by debt, eating ourselves alive in a feral nightmare of redistribution and entitlement.

Whatever solutions we explore, it’s crucial to heed Mark Cuban’s warning about pouring more easy money into the leaky pipes of a system that’s getting ready to blow. Whether it pops in a mighty trillion-dollar recession-inflicting bubble, or something less apocalyptic to the general economy that still leaves a lot of people drowning in debt, it’s important to restore that sense of value for money missing from so many areas of government-infested life. Free people should not be expected to make major life decisions based on incorrect or incomplete cost and benefit information.


Please let us know if you're having issues with commenting.