I want to play around with the idea of "interest-free" loans for college.
I have known people who received interest-free loans. They were always within-family transfers of money, much like the selling of property for a nominal price of $1.
In fact, I was the recipient of an interest-free loan. Mom-and-dad paid for me to go to Lansing Community College and then to the local State University. I paid them back.
I have a clear memory of dad putting his arm over my shoulder (we were standing in the basement, well out of Mom's hearing) when I was in the middle of my sophomore year of college, man-to-man, and telling me "Joe, I know there are a lot of things you enjoy doing. But I am telling you that if you do not get a job straight out of college...you are going to starve. I have six more kids right behind you and I cannot afford to keep you around as a pet."
That is when I became serious about studying and getting good grades.
I graduated a term early, again at Dad's urging. "Time value of money, son. Three months of 'real wages' amounts to something."
I paid mom-and-dad back every penny.
The problems with "Interest-free" loans and debt-jubilee
One problem with an interest-free loan is that the buying power of the nominal amount (usually in US Dollars) decreases every year. Three percent yearly inflation means that the buying power is reduced by half in about 23 years. That is hardly fair to the person asked to make the loan; to expect them to be paid back with debauched currency with no interest to compensate for diminished per-unit purchasing power. They simply will not do it.
The biggest problem with mandatory, interest-free loans is that you are applying coercion to MAKE people with "extra" assets give them to others without the receivers paying rent for the use of that asset.
If it were any other kind of asset, say a lawn mower or a motorcycle, you would probably agree that the owner of the asset should receive some compensation for losing access to the asset while it was loaned out and some kind of risk premium to compensate for any wear-and-tear it will incur while loaned-out including the extreme case where the borrower steals the asset and it cannot be recovered.
The problem with "debt-jubilee" is that loans will dry-up as you approach the jubilee-year. Why would any rational human make a loan the year before the jubilee-year when that money would simply transfer to the person it was loaned to. It would be a straight-up gift. The only thing worst than expensive merchandise (and borrowed money) is no merchandise on the shelves or no access to credit.
Looking at the wrong side of the problem
The problem is not that young adults are required to pay interest on the loans they take out. The problem is that young adults are given HORRIBLE advice about careers. Some prime examples are:
- It doesn't matter what major you choose. Corporations are just looking for a 4-year degree to check off the box
- Corporate recruiters tell universities that their graduates cannot write. That means they are screaming for Liberal Arts majors
- You are going to change your career seven or eight times. That means it does not matter what degree you get
- You are an athlete so we need to give you a dumbed-down degree (with zero salability) so you can spend time in the gym
- You can always get an MBA so your undergraduate degree doesn't matter
- Our surveys tell us that graduates Liberal Arts majors experience much higher salary growth rates than Engineering majors
- Psychology majors are STEM majors
- Follow your passion. It will all work out.
Young adults swallow that advice because they WANT to believe those messages. Academic counselors give that rotten advice because they are daffy and are afraid they will be called "dream-killers" or some other soul-crushing curse. The other reason is that they are shills for whatever college hired them.
They never ask the boring question "What are the Net Present Values of the incremental income stream generated by the degrees I am considering?"
Nearly all spreadsheet programs have a simple Net Present Value calculator built into them. "=NPV" is what you would use in Microsoft Excel. Put in the cost of "education" for the five-or-six years most students are taking to "experience" getting a four-year degree. Then put in reasonable expectations of annual income after that. Use some defensible interest rate like 6% or 8% because a dollar earned in your twenties is worth more than a dollar earned when you are in your fifties.
A junior in HIGH SCHOOL can perform the research and do the calculations.