Billionaire pays off graduates' student loans

[EVMaso]

Lots of great points brought up. Some people are taking this aggressively for some reason, name calling, character assumptions etc. I won't engage with that, it's not my style.

After reading the posts here, reading more about Smith's generous act, and thinking about it some more, I have changed my view somewhat, but I still have to come out negatively on this.

But there are some good things that have come from it:

- Robert F Smith did a good thing with his money. In fact in my original post it was never about Smith, it was more to do with the graduates. It reminds of of the YouTuber Mr Beast who has a ton of FU money and just does random acts of charity (tips waitresses $10 grand, purchased every.single.item in a grocery store and donated it all to a food bank, once bought a homeless man a house). Smith's intentions are well meaning but somewhat misguided (I'll get to that later) but overall there's no fault to him. Regardless of any ulterior motives Smith might have (publicity?), he did a good thing by helping people, and the world is a better place when people do good things.

- The students are actually going to also do well. This is where my view has changed. Originally I viewed them as akin to lottery winners, and it's well documented that lottery winners tend to lose control and end up in the same position pre-win or worse after a few years. But I realized there's a fundamental difference between the graduates and lottery winners. Lottery winners actively play the Lotto in the hope that they win and thus take a shortcut to success. However these students never played anything. They worked hard to graduate. The gift from Smith came from out of the blue. Those students who worked hard to have minimal or no debt upon leaving school (and thus did not get much or anything at all from Smith) will probably be fine. The ones who needed this kind of relief but flame out later in life probably would do so anyways. But Smith has given those students who are smart and hard working but shackled with predatory debt a headstart, which should only accelerate their progress. On the whole this event was a good thing for the vast majority of those students.

- This event made international headlines and thus has sparked some wide discussion on student loans and the whole post-secondary education complex and how scammy and predatory and broken it is for most of the US.

Here's where I'm still coming out on the negative for this event. Probably millions of people by now have become aware of this event, and for many of those people this still sends a signal that charity and bailouts from billionaires or governments are a good way to solve problems. It was made worse by Smith's call to action for other billionaires to copy him and bailout more students in the future. This is wrong. There are even 2020 US Presidential candidates who have some sort of student loan forgiveness in their platform to campaign on. How many students out there are hoping those candidates get in so they can be absolved of their loans, instead of taking the steps today to work themselves free? (to be fair there are probably instances of students getting caught in some predatory loan scheme that need help, but that's a case-by-case thing).

Charity in and of itself is generally a good thing, bailouts are sometimes necessary on a case-by-case basis, but if a system is broken, like the current post-secondary education complex, you should find the root cause and take action from there, not try and patch up the problems that happen later down the line through infusions of money from billionaires or governments.

 

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[Adelaide]

It appears his cause was to allow a group of graduating college students to start their careers without college debt. How could he have used the money more effectively? And what makes you think he knows that what he did was sub-optimal?

Seems to me that he was pretty effective in accomplishing his goal and I don't see any indication he realizes it wasn't an optimal use of his money. Though maybe you see something I'm missing...

I'm guessing you don't become a billionaire by not understanding your goals and the best use of your money (though I'm not a billionaire, so maybe some of them are just naive and lucky). I mean, MAYBE you understand his goals better than he does and MAYBE you know better how to spend his money than he does, but that seems pretty arrogant without providing any proof.

Are you sure you're not just placing your own values and beliefs over his actions?

Good question.

My interpretation of his speech was that his intention is to start a cycle of promoting people to pay for other's college - so the students could be debt free. As in, his actions were part of a bigger strategy or movement.

I'm questioning if this was the best action for this movement.
I really don't know.

I'm not suggesting that he doesn't know how to use his money. I'm suggesting that he has other goals that we are not privy to.

Either way, he (and you/this thread) have given me lots to think about.

 

[scottmsul]

The bigger issue is that college is too expensive and there's too much student debt. The total amount of student debt is 1.5 TRILLION. That's an unimaginably large number. And you're not legally allowed to default on student debt by declaring bankruptcy, unlike other types of debt.

In an ideal world college shouldn't be so expensive. A billionaire paying off student loans shouldn't make headlines, because student loans should be no-big-deal in the first place. Prices are high because of supply and demand - as long as students are both willing and able to pay exorbitant tuition fees, colleges will charge them. Willing because they follow the script (expensive=good!), able because government guarantees the loans.

I don't know the answer. Obviously billionaires paying everything is not sustainable. Elizabeth Warren's plan to forgive all loans would seriously suck for the economy. Government shouldn't guarantee the loans, but government seems to always trend towards more entitlements so I don't see it backtracking any time soon. Ultimately I think it's up to the students. Maybe they should factor in price more heavily, choose degrees that pay more, consider trade schools, or even skip college altogether. It's a free country, if someone wants to pay $200k for a history degree and work at Starbucks that's their decision. But it's not fair if taxpayers have to help subsidize that.

 

[Kid]

This entire discussion was predicated on your claim that billionaires paying for college would lead to hyperinflation. You never provided any substantiation for that (and I would argue there is none), and it now sounds like you're concerned about something completely different. But, it's unclear what that new concern is.



Google is our friend:

How America Pays for College 2018

According to Sallie Mae, 24% of college costs are covered by borrowing. The bulk of the costs are paid for by families, scholarships and grants.

Not saying student debt isn't a problem. It most certainly is. But it would seem to me that rich people choosing to donate money for kids to go to college is a tiny step towards alleviating that problem. You seem to think it makes the problem bigger, but you provide no substantiation for that concern, and it defies common sense.

In your opinion, what specifically is the downside to rich people choosing to use their money to pay off student debt for college grads?




In terms of "foreseeing what would happen," you asserted that it would lead to hyperinflation. You've yet to provide any substantiation for that (and again, I don't believe there is any). In fact, you seemed to have stopped claiming that...but I can't really tell from your vague comments.

If your concerns have changed, then feel free to mention your new concerns and we can discuss those. But, it's not clear to me what your new concerns are. Other than you think free education is bad.

Nothing wrong with that opinion, but again, without substantiation, it just a random opinion.

Btw, I'm not even going to address your choice to try to change the topic to government-subsidized college education (the link you provided). From both a political, social and economics perspective, that is a completely different situation from what we're discussing. And I'm not sure why you think it's analogous.

I think i had a bad day. Thanks for keeping your head cool

It seems that in my head those things are interconnected.
That one billionaire's donation can lead to something big like mass voting for someone who as president will make education free.

My view on education is very critical.
I live with at least 4 higher education schools just around the corner.

One school for example had a very splashy PR campaign about one team of students which made Formula One prototype and got some international reward for it.
This school has about 30k students, every year.
Team of five is treated like bait for former 29,995.

For me it doesn't differ much from money making scammers. Show one success and get paid despite of thousands of failures.

Things like that (this isn't one in a million case), make me think critically about it.

I've seen enough and heard enough about how those schools work.

I don't see problem in making money for educating young people
I see problem in cheating young students into believing (and paying for) unfulfilled promises. And doing it at massive scale.

P.S. The post got dark again, sorry. If you don't want to answer i'll be ok with that . Maybe i could find better topic.

 

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[scottmsul]

What is your reasoning behind this statement?

First, guaranteed tuition would subsidize overpriced colleges at the expense of other areas of the economy. In a free market, investments go towards areas with the highest returns, which is good for the economy because if there are high returns that means the goods being produced are in high demand. If a sector can only be funded through government intervention, that means resources must be diverted away from higher-return sectors into lower-return sectors. So for example, higher taxes combined with subsidized colleges might redirect resources that would have been used to build a factory instead be used to build a bigger stadium. The factory makes stuff that people want to consume the most, while the stadium does not (people might "consume" the stadium by attending and enjoying games, but the total satisfaction of wants is lower than in the case with the factory, since the factory had a higher return and didn't need subsidies in order to be funded).

Second, paying off loans would cause inflation, assuming the loans were paid using newly printed money. It's not hard to see why. Originally the students were going to pay $X back to the government, which the government funded by collecting $X from the taxpayers. Now the students can use the $X they were going to pay back, to instead buy new homes, goods and services, etc. So that newly printed $X will work its way back into the rest of the economy, and cause demand for all those goods to rise, making their prices go up. In the case that the loans were not paid back with newly printed money, there might not be any inflation, but there would have to be very high taxes to make up for it. Those higher taxes would lower production elsewhere.

As for the list of benefits. It's possible they might all be true and good locally. But even if that were the case, they would implicitly draw resources from the rest of the economy. That implicit harm to the rest of the economy would likely be greater than any local benefits, since the resources were taken unwillingly. But we can go through the list anyway.

1. We wouldn't have to worry about a major recession linked to consumer debt driven by school loans;

A recession can be a good thing though. If resources are currently allocated inefficiently and asset prices are too high, a recession can allow resources to be redirected towards new untapped areas of the economy with higher returns.

2. We'd encourage more young people to move into fields where they could focus on solving big problems as opposed to taking jobs just to repay debt (remember, innovation drives economies more than anything else);

I would think guaranteed tuition would cause people to "follow their passion" even more, and subsidize majors that contribute less to production. Yes, some people might take more risks and innovate more, but the net production would probably be lower. Also there's plenty of VC firms and startup incubators funding high-risk innovative businesses, if it could generate a return there's probably already incentive to fund it.

3. We'd encourage more young people to start businesses;

See above.

4. It would spur spending (GDP growth);

GDP is not the economy. If the government printed 10x the current supply of money, GDP would rise but production wouldn't. Production/actual fulfillment of desires is what matters, not price levels or GDP numbers.

5. It would spur housing growth;

Maybe. But if that growth can be traced back to government subsidies, it's still redirecting resources away from what would occur in a free market.

6. College degrees raise income, reducing income inequality;

College might be correlated with income, but I'm not so sure it causes it. Smart people choose to go to college but might have a high income regardless. Also there might be more productive ways of increasing income, like going to a trade school or interning. Getting a low-demand degree might actually lower income because of opportunity cost. And even if it did raise income, I'm not convinced income inequality is itself a "bad thing" that must be stamped out.

7. College degrees reduce unemployment, reducing cost of government subsidy and increasing tax revenue.

As for reducing unemployment, see above. As for government subsidies, paying the loans is the subsidy. How could a 1.5 trillion subsidy reduce subsidies???

Again, I understand that a lot of people are getting caught up in partisan politics ("FREE STUFF IS BAD!!!")

Free stuff is great! I wish college could be free. But it's not, it draws real resources to hire staff, renovate campuses, pay football coaches, etc. I agree about not being partisan. The laws of economics will hold true regardless of political parties. I disagree with the Trump tariffs and I also disagree with entitlement spending.

 

[EVMaso]

Except this was not charity nor a bailout.

What should we call Smith's act? Whatever we call it, its function and outcome is the same as those of a charity or bailout.

The kids didn't *need* the money, didn't ask for the money and weren't immediately struggling without it.

I agree with you that the graduates didn't ask for the money! See the second bullet point in my previous post.

How do we know that they didn't -need- it though? What is "immediately struggling"? We can probably safely assume they won't be out on the street without Smith's charity, but if they exit school only to have to scrape by paycheck to paycheck due to loan interest for the first few years afterwards, is that struggling? At what point do we say they -need- it?

He was simply doing a good deed to give these kids future opportunity to benefit themselves, their families, the economy and the country.

Again I agree with you! See the first bullet point in my previous post.

Too many people in this thread politicizing an event and determining the positive/negative value based on their personal politics.

As entrepreneurs, we should be able to view money/investment actions from an economic and objective standpoint.

It is natural that people analyze situations by drawing reference from their personal experiences, political or otherwise. I don't even think it's possible to analyze a situation as big and broad as the economics behind post-secondary education and the student loan system and come to any meaningful conclusions without some reference to politics.

scottmsul's latest post is a great breakdown.

Again, I understand that a lot of people are getting caught up in partisan politics ("FREE STUFF IS BAD!!!"), but as entrepreneurs, we need to be smart enough to examine things logically, not just have gut reactions based on our hatred for certain politicians or parties.

It's not that free stuff is bad, it's that there's no such thing as free stuff. Again scottmsul's last point explains this quite succinctly. Also people from both sides of the aisle can have a negative view on "free stuff".

Encouraging charity and bailouts to patch up the outcomes of broken systems is bad because it doesn't address the root cause of the brokenness. That seems like a pretty logical and non-political statement to me.

Too many people here who don't seem to have that ability.

Is this comment even necessary? It adds nothing to anything and is needlessly antagonistic.

The bigger issue is that college is too expensive and there's too much student debt. The total amount of student debt is 1.5 TRILLION. That's an unimaginably large number. And you're not legally allowed to default on student debt by declaring bankruptcy, unlike other types of debt.

In an ideal world college shouldn't be so expensive. A billionaire paying off student loans shouldn't make headlines, because student loans should be no-big-deal in the first place. Prices are high because of supply and demand - as long as students are both willing and able to pay exorbitant tuition fees, colleges will charge them. Willing because they follow the script (expensive=good!), able because government guarantees the loans.

I don't know the answer. Obviously billionaires paying everything is not sustainable. Elizabeth Warren's plan to forgive all loans would seriously suck for the economy. Government shouldn't guarantee the loans, but government seems to always trend towards more entitlements so I don't see it backtracking any time soon.

A+++ post, would read again.

Ultimately I think it's up to the students. Maybe they should factor in price more heavily, choose degrees that pay more, consider trade schools, or even skip college altogether. It's a free country, if someone wants to pay $200k for a history degree and work at Starbucks that's their decision. But it's not fair if taxpayers have to help subsidize that.

This.