The stock market’s been horrific. Volatility has been at record levels. Stocks are at 6, 7, and 8-month lows. The losses prompted me to stay glued to CNBC. Every morning this week, I woke one hour earlier and listened — rapt to the dancing futures and opening moments. Then, I’d be off to work, school, etc.
But this article isn’t about stock market woes. Instead, I want to focus on a CNBC guest and favorite, Mark Cuban. Cuban is an entrepreneur and billionaire (about $2.6 billion). He’s an owner of the Dallas Mavericks and serially invests in startups, businesses, and other money-making ventures. This week, he decided to speak out against the rising tide of student loan debt — something we can all agree is crushing our future economic potential.
At first, I welled with excitement and thought, “Finally, someone is going to start critiquing our financial destruction via student loans and provide sensible solutions to the $1.2 trillion debt.” Cuban exclaimed that we couldn’t continue this and that we were hurting the entire economy with this burden. But after complaining about the problem at length, he provided no solutions.
The CNBC anchors recognized this and asked him to elaborate on his answer. And that’s when I nearly soiled my pants. His big fix to this growing problem was to — ugh, it’s hard to write this — cap the federal governments tuition aid to students. More specifically, he proffered that students shouldn’t receive any more than $10,000 each year in aid.
The billionaire entrepreneur, successful businessman, and all-around sports guy said that a cap like this would force schools to reduce tuition and fees. This is when I began screaming at the TV with a rebuttal, desperate to be heard by the conservative messengers on CNBC. That didn’t work, so I took to my keyboard to muddle a rebuttal.
Unfortunately, there’s a growing movement among “experts,” pundits, and pretenders that solving the student loan crisis is as simple as cutting funding opportunities. Cut the funding and institutions will be forced to lower their costs. Economically speaking, they’re partially right. When you reduce the funding opportunities, this manipulates the “free market” for education.
With the “Cuban Plan,” the idealistic message is: cut aid funding and watch the tuition/fees crumble. With a $10,000 cap on tuition, Cuban expects institutions to follow in line. But that’s not what will happen. The reality is that the market for private loans and corporate, profit-hungry, debt-ballooning machines will take its place. Suddenly a controlled market of lenders by the federal government will be swamped and stalked by private lenders — only out to massage another percentage point (or more) out of desperate students who are eager to get educated and attempt to better themselves.
Many will be priced out of an education. The bloated budgets of higher education institutions won’t be able to simply adapt. Universities have been spending astronomical amounts on recreational centers, educational facilities, and residence halls (aka: dorms). While frivolous, the tuition and student fees are established. If they were to be reduced or cut due to federal aid money, schools may default on hefty loans to pay for these extravagances.
Cuban’s idea is a lose-lose. Schools will default, close, and/or fire massive amounts of educators. Students will be stuck with private loans to pay the gap, or be forced to relinquish their dreams of a higher education (and the future earnings potential). The only winner will be Cuban and his cronies — the 1 percent.
See, the rich will benefit because it’ll be another federal program that’s axed. And anything federal, governmental, or communally good is inherently bad among rapacious 1 percenters. Moreover, private funders such as Chase, Wells Fargo, and Bank of America will be able to roll up their sleeves, sell some toxic loans, and collect for decades. Those holding stock in those companies could escalate their wealth — all off the backs of low income and desperate students.
What we need is government reform. What we need is debt forgiveness. What we need is a growing mass of people that believe in future generations and their education. What we need is a long view — not the myopic, shortsighted one that Cuban propagated.
He’s right about one thing: there’s a crisis brewing and we need to change our relationship with student loan debt immediately. Tuition and fees need to be cut. For-profit universities should be unable to receive federal funding whatsoever. Taxation to support higher education of public institutions needs to increase dramatically. Be it from estate taxes or net worth taxes or capital gains taxes, somebody’s got to pay for it. And we can’t keep giving the bill to future generations.
These are the people that will take care of you when you are aging. These are the people that will discover the cure to cancers. These are the people that will reduce climate change. These are the people that will pioneer ever greater technologies.
It’s time to support them and ourselves.
Moron
Mark Cuban or me? 😉
You. Cuban is right! The schools are making a killing because the funds are easily attainable. You cannot default on student loans, that only makes it more of a burden on 18 year old kids that want to get a $100000 plus education so they can help troubled kids for $30000 a year. 18 year olds can’t drink a beer but can owe big money in student loans, it’s preposterous!
Joe,
I’m happy you expounded upon your thoughtful initial comment. Unfortunately, your information is inaccurate. You can “default” on federal student loans. The government considers your loan repayment plans as a promise/contract. Default is outlined by the FAFSA government website here: https://studentaid.ed.gov/repay-loans/default. You may be misconstruing this for “bankruptcy.” You cannot declare bankruptcy.
Thanks for your reply,
Sam
Sam – you may want to lay off the CNBC there buddy. It can be bad for the blood pressure! I have to agree with you that Cuban’s plan is a lose-lose, lenders with mafia levels of interest would quickly fill the void. These would be the same people who loan HDTV’s to poor people at exorbant rates. Mark Cuban…pshh. Look at whose espousing that theory. Mark Cuban is no expert in this field. Actually, Mark Cuban is an expert on being pro-debt as he has strategically leveraged debt to his advantage throughout his career. He has not been burned by debt like the average American has. In short – I do not value Mark Cubans opinion on this topic.
I see both sides on this issue. Perhaps a compromise is to gradually scale back the amount of Government assistance over a 10 year period. This allows the Universities time to adjust to the new economic reality that the prices they are charging are not sustainable. I’m an alumni if a large public university and every time I visit they are building new massive additions to the campus even while pushing their online education programs. They have to recognize that us not sustainable.
Josh,
I appreciate your comment! Thanks for writing. What would be your hesitation to increase education taxation at state and federal levels, regulating tuition increases, and then limiting student loan aid? Tuition and fees are spilling over, but its caused by various factors acting on the price of education. Let’s address each of those, and then consider federal aid cuts.
Sam
I would love to hear what schools are doing on an individual level (if anything) to help reduce tuition costs. What if instead of a new state of the art gym (replacing the already fully functional gym), they spent however many millions towards reducing fees?
Cuban’s comments are usually out there and not usually realistic. He does a lot of things for shock value so I don’t put much stock into anything he says. His idea is completely ridiculous though and it’s only coming from a high flying investor who has probably never had to deal with student loans before.
The real way to fight the student loan problem is to increase funding of state schools and cap tuition. It used to be the case that states provided most of the operating costs for their universities. That money has been cut so the schools have to make up the difference in tuition.
I think we should cap the cost of public universities at the level where you could pay off a full set of loans with 1x the starting salary of their graduates. If a university is turning out grads on average who make $100k/year, then I don’t think $100k for their education was a bad deal. But if a school’s grads are averaging $20k a year straight out of college, then they shouldn’t pay $100k for that education.
But it all comes back to public funding. Other countries look at the US and think we’re crazy. College is cheap or free in many parts of the world.
When did education become a commodity which countries sell to their citizens rather than an investment in their future workforce?
This may be the most cogent and concise explanation I’ve heard. Exactly!
Because…. economics. Education requires resources. There are a limited number of resources. Allocating those resources is the challenge. Some believe central planning is the most efficient method, others believe that the aggregate of individual decision makers is more efficient. Either way, you cannot ignore the reality of economics.
“The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”
― attributed to Thomas Sowell
“When you reduce the funding opportunities, this manipulates the “free market” for education.”
There isn’t a free market environment in education, which is part of the problem. Subsidizing tuition costs has lead to the increase in tuition prices. It was the same with the housing bubble (the primary subsidy for housing was FMA and GNMA, along with absurdly low interest rates, both conditions still present). However, it is the same with any subsidy. With regard to education, increasing the available supply of subsidy, whether it be a grant, or subsidized loan, increases the available capital to exchange for this good, which has lead to an increase in prices, which further increases the need for said subsidy. The supply and demand control on prices that is present in a real ‘free market, is disrupted by these subsidies. One major subsidy (more to lenders than students), is the inability to discharge student loan debt (in most cases) through bankruptcy. This has allowed lenders to take on additional risks and make more loans than they normally would have. The banks have no incentive to lend based on earnings potential of the applicant because of this discharge exception. People can take on debt for degrees that are essentially worthless, or to pay for tuition that exceeds the value based on earnings potential, simply because the banks have much less default risk. They still have to deal with default risk (not being paid on time), but being able to chase people for the rest of their lives for payment of principle, fees and interest greatly decreases the risk and misaligns the interests of both borrower and lender.
These imbalances caused by the subsidy must be solved by one of two major actions, 1. end subsidies 2. create controls to attempt to offset unintended consequences of the subsidy.
Ending the discharge exception of student loan debt would go a long way to address the above problems, otherwise, there needs to be a statute of limitations involved for collection, including a maximum number of years lenders can peruse defaulted student loan debt, maximum fees and interest allowed to collect, etc.; and/or controls on what learning institutions who accept federal money can charge (including finding a baseline and only allowing cost increases according to inflation), cap what lenders can lend, or some combination that attempts to control the price to balance the artificial increase in demand that results from the subsidy.
Matt,
Thanks for your thoughtful comment and response. It’s difficult to assess for the direction and cause for student loans, increased tuition, etc. The fundamental question is whether student loans have ballooned due to rising tuition rates, or, as you seem to posit, tuition rates are responding to the fountain of funding available. I personally believe there’s likely an interaction effect between the two — with for-profit, publicly-traded institutions succeeding off of this governmental largesse.
I’m not a believer in this economic concept of free market thought. I don’t know one market that’s truly free. Every market has its manipulators, monopolies, etc. I personally believe that the era of believing in free market principles needs to come to end. Frankly, there are just some industries that should not be made for money making (i.e., health care coverage and student loans). As it stands, the government is making millions off of the interest on these student loans — an additional problem brought on by conservative interests.
Sam