Student loans have become one of the major buzzwords of the 2016 presidential race. Most candidates agree that something must be done to help struggling student borrowers, even if they don’t agree on much else. The Democratic party has been particularly vocal about the student debt problem, with candidates offering a variety of solutions to help current borrowers and prevent future overindebtedness. A few weeks ago, Hillary Clinton finally unveiled her vision for a student debt solution.

Hillary Clinton’s Student Debt Plan

Clinton’s plan to eradicate student loan debt, the New College Compact, is a multi-part initiative meant to expand a program enacted by Bill Clinton during his time in office. It involves a $350 million cost to the federal government, to be paid over 10 years. The plan promises the following:

Free tuition for community college
Students in 4-year, in-state public colleges will pay their earnings from working 10 hours per week, with no other tuition, fees, books, or other costs
Families will make an affordable and realistic family contribution
States will invest in higher education by maintaining current levels of higher education funding and reinvesting over time
The Federal government will make a major new investment in the New College Compact and will never again profit from student loans
Colleges and universities will be expected to improve their outcomes and manage their costs to ensure that tuition is affordable and students complete their degrees
Students who already have loans will be able to refinance at current rates; this will provide relief to an estimated 25 million borrowers
Interest rates will be lowered to reflect the government’s low cost of debt, saving the students thousands of dollars over the life of the loan
Everyone will be able to enroll in a simplified income-based repayment program so that borrowers never have to pay more than 10 percent of what they make

Mark Cuban Bites Back

Mark Cuban, billionaire entrepreneur and Shark Tank favorite, has been forecasting the burst of the student loan bubble for more than a year. He believes that student loan debt is headed for a meltdown equal to that of the real estate crisis of 2008. When Clinton published her proposal, Cuban was quick to condemn it.

Why does he caution that Clinton’s proposal is doomed to fail? Cuban opines that the more money is available to students, the higher tuition will climb. The plan puts no restrictions on the operations of those colleges receiving funds, so Cuban suggests that the schools will go on a spending spree for new facilities and other perks to attract the best students in a competitive market. That will add extensive long-term expenses to the schools’ budgets, leading to further tuition increases. Worse, the cut-throat business of attracting new students with state-of-the-art complexes, dorms, gyms, and food courts eats up funds that should be appropriated toward compensating competent professors and providing necessary educational materials.

The plan, suggests Cuban, doesn’t just encourage irresponsible spending by schools. It also encourages irresponsible spending by students. By mandating repayments of just 10% of income, with any remaining debt forgiven after 20 years, Clinton’s proposal completely divorces a student’s current and future financial resources from decisions about spending on tuition. Imagine being guaranteed a mortgage loan with payments of 10% of your income, with the remainder forgiven after 20 years. You would pay the same amount for a $100,000 home as for a $10 million home and your lender would eat the cost. Under Clinton’s proposal, Cuban says, the same issue applies. Students have no incentive to choose a $3,000 semester at a state school over a $30,000 semester at an Ivy League school and the federal government will eat the cost.

This has the secondary effect of distorting the price pressure that students can put on universities. If tuition is too expensive and people refuse to go to a given school for a given cost, the school will be forced to lower its prices. If the students don’t have to consider the cost, schools are free to charge whatever they want knowing that the federal government will foot the bill.

Cuban is also concerned about the fate of liberal arts studies. The plan does not take into consideration the idea that not every student is destined for engineering or technology degrees. If the New College Compact holds colleges accountable for students that do not pay back their loans and the job market for liberal arts degrees is less lucrative than that for STEM graduates, the inevitable endpoint will be the demise of liberal arts schools and programs.

The Cuban Solution

He doesn’t like Clinton’s plan, so what does Cuban think is the solution to the looming student loan debt crisis? He suggests a business-minded approach. Cuban states that while Clinton attempts to resolve the issue with quasi-socialist remedies, applying solutions that work within a free-market structure will be the most effective. He suggests colleges use a cost model like that of a business. Further, he counters suggests limiting how much students and their parents can borrow every year, limiting the supply of cash on hand for tuition and forcing schools to lower their tuition.

No Easy Answer

At the end of the day, there’s no easy answer to the student debt problem. Tuition is too high, there aren’t enough jobs to employ graduates so they can pay off their loans, graduates have the wrong kind of degrees for the jobs that do exist, and schools have no incentive to change the structure. There isn’t going to be a quick fix for this one.

While the politicians and pundits battle over the best ideas, many students and graduates are left to continue struggling to make payments on their student loans and many new students face tough decisions about financing their education. That leaves students in a difficult position – stuck between the need to get an education and the risk of defaulting on your student loans. If you’re struggling with student loan debt, we may be able to help. There are a variety of payment plans and refinancing and consolidation options that can make your payments manageable. Contact us today for a free consultation to learn about your options for managing your student loans.

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