The Medicis are dead white billionaires.
Not Senator Elizabeth Warren’s kind of guys.
Yet, before she continues to talk about wiping out college loan debt, Senator Warren needs to channel the Medicis.
In a fascinating article in this morning’s Wall Street Journal, Jackson Toby, emeritus sociology professor at Rutgers and author of The Lowering of Higher Education in America: Why Student Loans Should Be Based on Credit Worthiness, argues that the fourteenth century bankers might have better ideas for solving the college loan crisis than Senator Warren.
Warren, you recall, was recently confronted by an angry father, who had sacrificed to pay for his daughter’s college education and was furious that Warren has a plan to forgive the college debt of those who have acted less responsibly.
The Medicis would never have ended up with a lot of bad debt.
Toward the end of the 14th century, the Medici family of Florence started a bank that became widely imitated. The secret of its success: The Medicis were skilled in evaluating the creditworthiness of loan applicants. A borrower who proposed a loan to finance a business venture had to be personally reliable, with an idea that was likely to succeed. The Medicis charged interest at high rates but most loans were repaid, benefiting the borrowers, the bank and Florentine society.
An earlier editorial in the Wall Street Journal observed that around 10% of student debt is 30 days or more past due. Another 20% will likely end up in default before the lan is repaid.
The Florentine bankers, Toby suggests, would be shocked by our student loan mess. By the way, I bolded part of a sentence because it is important to highlight: loans going into default harm the borrowers, the bank, and society. Loans that aren't repaid help nobody. Why is our society less able to make good loans than the Medicis in the fourteenth century?
Has the Medici secret been forgotten?
No. For political reasons, Congress doesn’t allow the Education Department to consider whether a student will be able to repay a loan. The department considers only financial need and whether the applicant is an accepted or enrolled student. Neither Democrats nor Republicans want a program that denies loans to needy students, even those with dubious academic qualifications or a history suggesting unreliability. This has become no small problem for the federal budget. Some 45 million student loans have been made.
Why did so many high-school students take on loans they couldn’t pay back? One reason was that parents, teachers and the media impressed upon them that attending and graduating college would lead inevitably to better-paying jobs. Students also failed to appreciate that what they studied—and how much they learned—mattered to their prospects.
Also, in the 1960s, college ceased to be a luxury item. Colleges wooed prospective students with better appointed dorms and easier courses. They did not have to worry as much as they might have about jacking up their prices. Students, convinced that a degree was the key to success, were taking out loans. While these loans might later be a dreadful burden to the borrowers, they enabled colleges charge higher freight.
Toby argues that the canny Medici would never have allowed this unrealistic system to develop:
Suppose the Medicis had been in charge of the federal education program. Could the family bankers have prevented the financial disaster of loan defaults without surrendering the prime political objective: college opportunities for high-school students from low-income families? Yes, if Congress had been realistic about offering loans only to those who could repay—and grants to some of those who couldn’t.
The Pell Grant, which is offered to low-income students, are so small (the largest is around $6,000) that they make little difference in a student’s ability to obtain a degree. The Medici would likely have made such grants larger and more meaningful:
If Congress would like to offer bigger gifts to college students from low-income families, legislators can double or triple the maximum Pell grant. This wouldn’t bother the Medicis; they were generous. What would bother them is to award what are called “loans” without attempting to find out whether repayment is realistic.
It is difficult to assess the credit-worthiness of somebody who is just graduating from high school. The Medicis, Toby says, would have found a way. Grades, absence of arrest records and other factors could have been factored into the equation. They knew the key characteristic of a good loan: it is repaid.
Such a system for evaluating applicants for college loans would have collateral advantages. A loan would return to its traditional meaning: money that has to be paid back. Further, when prospective students learn what is required to take out loans for higher education, it might motivate more studious behavior. But the first step, the Medicis would say, is to clarify the destructive misunderstanding of the difference between grants and loans.
I still believe that undertaking major debt right out of high school is a bad idea. The real problem is that tuition has become unrealistic. It is no longer possible to work one’s way through college. The availability of loans has of course contributed to this. But it is the cost of college, even more than loans, that must be addressed.
Still, Senator Warren might consider taking some college loan advice from Florence’s canny dead white billionaires.