The Capitalist Investor - Episode 11

There is no question that we have a student loan problem in our nation, many are calling it a crisis. All of the candidates for President of the United States are touting solutions to the problem, as they should be.

How did the student loan crisis come about in the first place? Whose fault is it? Some of the Democratic candidates today are blaming Capitalism, but is that warranted? In this episode, Derek and I look at the data behind the student loan tragedy that many students have fallen victim to. We want to better understand the reasons for the crisis and whether or not the solutions being offered even make sense. Join us for this quick dive into the data and the philosophies behind the student loan problem solutions being offered.

Outline of This Episode

  • [0:32] Student Loan debt: It’s a crisis we must face and fix
  • [1:04] What’s the mindset we need to have in fixing this problem? J.F.K. told us
  • [2:00] Stats that impact the way we understand the crisis
  • [5:08] Political candidates are placing blame on Capitalism. Is it at fault?
  • [9:36] The solutions being offered to the student loan problem are not workable for this reason
  • [12:54] Price competition is the only solution – here’s why

Here is THE fundamental flaw in how people think about the student loan problem

Former President, John F. Kennedy, a Democrat is famously quoted for saying…

“Ask not what your country can do for you. Ask what you can do for your country.”

That’s a noble and powerful mindset that many Americans have adopted even before he said it. It’s the way our country has thrived over the years, citizens have put the interests of the nation above their own private interests. That’s powerful when it’s acted upon, but many who are in trouble because of student loan debt are thinking and acting in exactly the opposite way.

To hear the details of the careless thinking that’s going on in the popular debate around this subject, listen to our conversation. We get into the mindset and motivation behind the debate that’s happening on both sides of the political spectrum.

The unbelievable data behind the student loan crisis

Over the past 20 to 30 years (this post is being written in March of 2020), tuition costs for higher education have increased at a rate of around 8% annually. That FAR exceeds the current rate of inflation, which is just above 2%. As you can see from that simple data, tuition rates are increasing much faster than anything else in the U.S. economy. From the 1980s all the way up to 2018, the average cost of college tuition increased by 213% for public institutions and 129% for private schools, and this IS adjusted for inflation.

Wages in the meantime have only increased by 67% during the same time frame. That is a vast chasm between the cost of higher education and average American’s means to pay for it. This episode points out the devastating position many students are in as a result and prescribes the only solution possible. Be sure you listen.

The student loan crisis has been created by an abundance of guaranteed student loans

Though some of the current Presidential candidates are saying that Capitalism is to blame for the student debt problem, it’s actually the Socialistic policies implemented over the past 20 to 30 years that have created the problem. Guaranteeing student loans to anyone, even if they don’t have the means to repay them, encourages colleges to give out money hand over fist in the form of student loans because they know the government will pay them back. Students bear the brunt of that “convenience” in the form of student debt.

The solution to this problem is not to forgive debts wholesale, which some Democratic candidates are proposing (we’ll get to why that is a terrible option). The answer IS to stop offering such a massive amount of guaranteed student loans. This will force colleges to compete for interested students rather than simply accepting everyone based on free money from the government. Prices for higher education will come down as a result.

The solutions being offered will actually make the problem worse

Currently, the solutions being offered for the student loan problem are not very hopeful. Bernie Sanders and Elizabeth Warren both propose some version of a 1% transaction tax on investments, which means those investing their money will be the ones paying for the default or guaranteed loans that are being forgiven.

This is a very bad idea. Basic economic theory states that you should never tax capital-formation initiatives like investing. When the government penalizes people for investing and saving, the economy will stall. Worse, this will exacerbate the problem because it will encourage colleges to raise prices even more. Capitalism allows the market to dictate prices for products and services (like higher education) and it must be allowed to do so when it comes to college costs. Listen to hear the real solutions and why you should not buy the options being provided by Socialist-leaning candidates.

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Keep Listening to The Capitalist Investor:
Episode 16:
Bull Market or Bear Market? with Nate Fischer, Ep #16
Episode 32:
Why You Need A Financial Backup Plan, Ep #32
Episode 48:
Asset Allocation Dilemma: Why the 60/40 Portfolio is Dead, Ep #48
Episode 64:
Cannabis Stocks Lighting Up—How to Play the Trend, Ep #64
Episode 80:
Americans Postponing Retirement Due to COVID?!?, Ep #80
Episode 96:
4 Big Risks That Could Trip up the Stock Market Soon, Ep #96
Episode 1:
Capitalism vs Socialism
Episode 17:
The Psychological Impact Of This Recession, Ep #17