The Rich, Big Winners of the Student Loan Program Are Not Students

Following the money

If you want to know the secret of anything in this world, all you have to do is to follow the money. The money never lies. This article was inspired by an open discussion where I made a suggestion against taxes, and people didn’t get it. Student loan was never about students.

There is a huge knowledge gap about how money works today. For example, the US dollar you spend today is not the same as the US dollar before 1971.

Yet, most people are still doing what people were doing for money in the 1960s. In 1971, the US dollar became a debt certificate. Money was backed by nothing. And the whole world had pegged their currency to the USD.

So, today when you have programs introduced by the US government, you need to actually look carefully to understand who really benefits from that.

The Biggest Losers on Student Loans

The biggest losers on student loans are the students. They are getting the worst deal ever. I heard someone rant on social media the other day saying that if he had known that adult life would be like this, he would have bought a house before high school and not gone to college at all.

How can someone in their right mind take a loan to go to school? That idea is so stupid that it bothers me how it became mainstream.

Scholarship is a great idea. I believe in scholarships — both full and half. The idea of getting parents to pay or getting a guardian to pay is good also.

If a person is working and they can pay from their salary, that is also a great idea. But for someone who doesn’t know what the working life looks like to take a loan to acquire knowledge that may or may not be useful (in the age of internet) is completely crazy.

First, you have to understand what loans are. Loans are business instruments. You take a loan because you want to embark on something that will make you more money. That is what loans are fundamentally for.

In business, you use loans to acquire assets

But the lines started getting blurred when people started taking loans like car loans. But it was easy to give such loans because those people had salaries (or incomes) that could serve as collateral.

The student loan is just a wild variant of this. First, it had to be mandated by the government. That proves something is wrong. The business math doesn’t work. This is why the student loan debt in the US is currently 1.77 trillion dollars.

If you took a $100k loan at 18 years old to buy a house, you made a wiser decision than someone who did that to go to school. While sometimes, this could yield good results for some people. They go to school to study something relevant and they now earn 6-figures per year because of that. For most people, it doesn’t work that way. Many eventually find themselves doing things that have nothing to do with what they studied in school.

If I had taken a loan to go to school, I would be super pissed with myself because what I do to make money today has nothing to do with the course I studied at the university.

The students are the big losers in the student loan program. Here are my reasons:

1. They get a debt burden early in life which becomes a source of anxiety immediately after school ends (and adult life begins)

2. With the exception of Ivy League schools, the experience is not worth the amount (considering what else the money could have been used for)

3. The interest on the loan is compounded. It is not interest-free. And that means someone is making money off the naive student

4. The entire program is dependent on a strong jobs market. And in many cases, those jobs are modern slavery for many people. For example, in the September 2023 US jobs report, the net new job gains were mostly part-time and people taking multiple jobs. The full-time job report was actually a net negative

5. A person with student loan debt after school is not really free to do what they want. They have to prioritize paying back their debt. The debt will affect the choices and life decisions

6. The student will not learn about money in school, which sets up a very difficult life for most people

Don’t get me wrong. It is good to go to school. My idea is that it is a horrible financial decision to take a loan to go to school.

That makes you think about who benefits.

Another Big Loser

There are two big winners of the student loan program. But before talking about them, there is one more unexpected loser. And that is the government.

Yep. The government is a big loser. In fact, you could argue that the government is a bigger loser than the student. When a large chunk of the national debt is student loans, that is no longer the problem of the student alone.

And worst of all, the current US government is embarking on student loan forgiveness. And you must understand something about money — there is no such thing as forgiveness. Numbers don’t forgive. They have to be balanced.

So, when you hear that the government forgives student loan (which makes it sounds like student loan is a crime that needs forgiveness), they just move the burden from the students to the taxpayer.

But the burden doesn’t really move to the taxpayer directly. The government borrows money (that is, create new bonds), to pay for the loans. And then the new government loans will be paid back (with interest) by the taxpayers.

You may say that the schools are producing productive people into the workforce of the economy. Then, in that case, I will ask you to look into the labor participation data of the US. Has it increased significantly since the student loan thing started? The answer is no. The rate was about 59% in 1965 when the idea of student loans started. Today it is 62.8%. It was about 65% in 2010 when Congress mandated the direct loan program under President Obama.

The First Big Winner

Who do you think is making the most money from the student loan saga? Well, the first that comes to your mind if you understand finance is the bank!

The program gave the banks new clients. People who think the student loan idea is a good thing have forgotten how uncertain life is. There are so many people who regret the student loan afterward.

If you figure out something at 18 years old that made $200k, will you use that money to go to school? Think about it

Nobody says it out loud, but the purpose of going to school is to gain the capacity to make money. But we also know that the richest people in the world didn’t gain their capacity directly from school.

I believe the schooling experience is important, but the idea that someone should get into debt for it is ridiculous. I believe people can always find a way to pay.

However, since the banks have a loan program for students, many are obliged to use it. And of course, that leads us to the second big winners.

The Second Big Winners

The schools. Have you checked the tuition for many of those schools? Completely crazy. And you know why the tuition can be that crazy? They know that there is a loan program.

They know that there is a student loan program. And they know you don’t need to have the money to pay. So, all they have to do is to market hard and pitch the naive young kid.

They know they will get paid. Not from you, but from the bank. And you are going to be indebted to the bank. So, you cannot say tuition is expensive.

This is why the endowments of these schools are as big as hedge funds nowadays. Those schools have billions of dollars under management. And in many cases, they have to hire a Wall Street guru to manage their portfolio.

Schools have gotten rich from the student loan saga. They are arguably the biggest winners. While banks get paid gradually over a long period. Schools get the money in an instant. And they get to put that money to work on Wall Street instantly.

So, yeah. Education is a business. Better to think of it that way. It won’t work for you by default. In fact, it is designed to work against you by default. You are the one who will make up your mind that it is going to work for you and devise a plan for that.

Conclusion

The biggest winner of the student loan program is not students. The biggest winner is the schools. And next to them is the banks. The biggest loser is the students. And the next loser in ranking is the government.

The people getting rich from student loans are those in the education business. This is not to say that you shouldn’t take a student loan. This is just to make you aware and give you materials on which to make decisions.

Taking a loan to go to school isn’t going to be worth it by default. You are the one who will devise how you will make it worthwhile for you.

Know the game you are playing.

I rest my case