James Altucher knows a lot about being a student. A lifelong learner, he went to university to study computer science and later taught himself to be a successful investor and entrepreneur.
In his investments, Altucher frequently manages to discover hidden aspects of a company or a sector and turn a tidy profit.
Looking at the U.S. economy with his unique perspective on analyzing risks and opportunities, he has found, unfortunately, that the student loan system may the single most destructive force in our country today—not only for the individuals who have to pay back the debt, but for the whole economy.
He sat down with The Epoch Times to discuss this controversial topic.
The Epoch Times: James, you have focused on student loans recently and have done a fairly extensive analysis. Why are student loans so harmful, not only for the people who take them out but also for the whole economy?
James Altucher: If you trace a lot of problems about what’s going to happen to the United States in the next 10 to 20 years, it boils down to not necessarily the educational system itself but the machine behind this educational system, which is tuition and student loans.
People argue with me all the time, “College was the best experience of my life; in college I learned this and that.” I have no argument against that. People should go to college. People should do whatever they want when they’re 18 years old.
The problem is, student loan debt is $1.2 trillion, and tuitions have gone up faster than inflation every single year since 1977—like 9 percent faster. Health care has only gone up about 3 or 4 percent per year faster than inflation since 1977. And when I say since 1977, it’s every single year—in not one year have tuitions gone down versus inflation. That’s 40 years.
So you have to ask why, and this has nothing to do with whether college is a good experience or a bad experience. But it does drastically affect the way kids today are viewing their opportunities in the world versus when I was a kid. So I graduated a couple decades ago and I had student loan debt but that was very different than the debt people graduate with now.
In the United States, the government backs student loans. So at the age of 17, in most states, you can’t even get a tattoo on your arm without parental consent. But let’s say a day later you turn 18, and you can borrow $200,000 by yourself to go to college.
For an 18-year-old, their brains, evolutionarily speaking, don’t know how to assess the risk of borrowing that kind of money. They think, “Oh yeah, I’ll pay that back no problem,” because 18-year-olds are encouraged to take risks. From an evolutionary perspective, they are supposed to take risks; they are the young, healthy hunters in society and are supposed to take a little more risk. So taking out $200,000 in loans is no problem for them.
The difference between that loan and any other loan in the United States is that you have to pay back that loan. You could be 40 years old and have a half a million dollars in student loan debt. Bankruptcy will not get rid of that debt. If you have housing debt, no problem. They’ll take your house but you don’t have to pay the debt back.
Now, I’m not saying that’s good or bad. People should pay back what they owe. But for a kid to say, “Oh yeah, I’ll take on $250,000 dollars in debt,” and then by the time they are 40 or 50, they are $500,000 in debt because the interest compounds …
And then they think, “I don’t even want to be a lawyer anymore. I don’t want to be a doctor. I don’t want to be an accountant.” But they can’t do anything, and they have to pay back that debt. If they declare bankruptcy, all the other debt goes away. But the government says, “We will still take your income and you can’t buy a house until you pay back this debt.”
The Epoch Times: This incentivizes colleges to raise tuition.
Mr. Altucher: What happens is, because that debt is guaranteed, colleges say, “Oh well, we know we’re going to get this money. Nobody is going to prevent us from getting this money.” So colleges raise tuition every single year. So tuitions now are unbelievably huge.
The government and its affiliate organizations make loans like Sallie Mae. They will lend to 18-year-olds. They never used to lend to 18-year-olds. When I was 18, you couldn’t even get a credit card. Now we can borrow $200,000 dollars in student loan debt because the debt is safe, because the government will take your income no matter how old you are.
The Epoch Times: What are the effects of this chain of debt on the individual?
Mr. Altucher: So it used to be the case that though I majored in something in college, I didn’t have to do that for a living. I could change careers or I could be an entrepreneur. I could be an artist or I could be an inventor. But now, almost as soon as you graduate, you have to start paying back those loans. So if you were going to be an entrepreneur, you can’t take that risk anymore.
And so you see that while debt has been going up, wages have been going down for that age group, 18 to 35, since 1992. So this generation of kids who are graduating college now is the first generation that physically cannot choose to be entrepreneurs or innovators.
The United States, for 250 years, has been driven by its innovation, and we’ve invented everything. In the ’90s, we had the internet, billions and trillions of dollars in value. We have right now innovations in biotech, robotics, alternative energy, but all of that is ending.
Fewer businesses are being started than ever because people have two choices: Do I take a job where I could try to pay back my debt, or do I take a risk and maybe get into really big trouble? Because it’s not like I’m going to default on my loan, and you’re not allowed to default on these loans. There’s no such thing as defaulting on student loans.
I’m not saying college is bad. The idea behind backing student loans seems good. The government is saying the United States should be competitive and everybody should get a higher education and study physics or electronic engineering.
But if you study humanities, your first job is going to be $25,000 a year income, yet your debt is $200,000 plus interest, so you’re going to be in trouble. And you’re not going to be able to take risks, and you’re going to lose opportunities.
The country won’t benefit from the future inventors of the world and you’re losing the opportunity to have a happy life because you’re going to be so obsessed with debt and paying that down.
The Epoch Times: Of course, there are people who are benefitting from this government largesse, but it’s not the students.
Mr. Altucher: College presidents, because of raising tuition, are earning salaries of millions of dollars a year. The president of Quinnipiac College makes $1.5 million a year. I can give you a dozen other examples.
The Epoch Times: The fundamental problem of this scheme is that young people just don’t know what kind of trouble they are getting into.
Mr. Altucher: The student is unqualified to make that decision. I mean, when a bank lends a business money, the bank does due diligence. The bank says, “Is this business in a good industry? Do they have a good management team? Are they making profits?”
But now 18-year-olds can borrow more money than businesses can and it’s kind of a backward way of looking at finance. It’s not correct. And when finance is upside down like that, the ultimate outcome has to be negative. It’s not going to be that just by luck the outcome will be good. When you’re lending to people who are not qualified to make borrowing decisions, and you have people who are not qualified to make lending decisions, the outcome is going to be bad.
The outcome, in this case, is going to be fewer entrepreneurs, less risk-taking, less innovation, fewer artists—I’m not talking about just entrepreneurship. Fewer artists, fewer creatives, fewer writers, fewer people who are willing to do the things that are a little bit less traditional, and yet we’re living in a time now when the entire economy is shifting to nontraditional forms of income.
The United States for 100 years was based on a factory system, and then for the next hundred years, it was based on a corporate system, where instead of going to the factory, you go to the cubicle and the jobs are relatively steady. But cubicle jobs are getting fewer and fewer, and factory jobs are disappearing. So you have to come up with alternative lifestyle businesses, single-owner businesses.
Again, that kind of income is volatile, and you cannot have a volatile income if you have a gun to your head saying you have to pay this debt back. I don’t know what the end result will be, but it will be bad. It’s not going to be next year, it’ll be 10 years, 15 years, from now. We will realize, “Hey, what happened to that last generation?”
We’ll say, “Where are all the innovations? Where are all the entrepreneurs? What happened to all the risk-taking in the United States?” We’re already starting to see it. This is not a brand new phenomenon. This has been happening for decades, and I can’t really think of a solution.
The Epoch Times: Is there no hope?
Mr. Altucher: It’s not like all of a sudden tuitions are going to go down because all the college presidents are so generous they’re going to lower tuition, and it’s not like the government is going to stop backing student loans because people say “You have to help people pay for college.”
The general intent was good, it just had a bad outcome. And it’s hard to convince 18-year-olds to not borrow this money and not go to college because the price of tuition is a function of supply and demand and only if you reduce the demand will the price go down.
Eighteen-year-olds, more than ever, want to go to college because they feel like it’s a way to get away from family. I mean, the good things about college are still there. You get away from family, you have a social experience, you meet new friends. It’s your first time out of the home. You practice being an adult. It’s hard to convince an 18-year-old, “Now, you’re the one who should save the world now.”
The result is less freedom and higher tuitions because demand keeps rising as the government throws all this money at 18-year-olds. Once this 18-year-old turns into a 22-year-old with a college degree, no more freedom. You’re chained to a stable job that will hopefully—but probably will not—pay back the debt. I know so many people in their 40s, 50s, 60s still struggling to pay the debt from 20 years or more years ago.
I think the solutions are all too utopian, because the real problem is the price of tuition and the student loans dished out by the government no matter what the price of tuition is. Demand is just going to keep staying the same.
And it’s not like there are that many new colleges being created now. There are online colleges, but they’re not being accredited. Students think you need to go to an accredited college, meaning the government approves it. There aren’t many online accredited universities.
So the supply is not really going up, and the demand is staying the same or rising. The price is just going to keep going up, and I don’t really see any solution to that unless as an entire generation of kids say, “We don’t want to go to college anymore.”
Interview edited for clarity and brevity.