Student protest at the University of Vienna, October 2009

Banks: The Student-Borrower’s Best Friend!

I made a statement in a recent op-ed published at Values and Capitalism that banks do student-borrowers a favor by allowing them to use money in the present pay it back in the future. Considering the nature of some of the feedback I received, I think it is worth exploring in more detail why this is the case.

First: Loans are a form of exchange, and all exchange is mutually beneficial. Loans entail the inter-temporal exchange of money. Lenders give up present money in exchange for future money plus interest. Borrowers give up future money plus interest in exchange for present money. Neither party would engage in this transaction if they did not believe it to be to their ultimate benefit. And oftentimes, it is indeed to the benefit of both parties. Student loans, for example, (usually) empower the borrower to acquire higher-income jobs that earn the borrower far more than the cost of his loan. The lenders then receives full compensation plus interest–their plan all along.

The loan contract is to the subjective benefit of both parties. The fact that anyone is willing to take the risk of lending money is thus beneficial for borrowers everywhere. Banks, the most common type of lender, can therefore be seen as doing borrowers a favor (though they get benefit in return).

Second: No one is forced to obtain a loan. Though purveyors of certain ideologies might say otherwise, it is simply not the case that student-borrowers have no other choice but to get a loan. Yes, the way today’s society is organized indeed makes it seem like going to college is the only realistic option for one hoping to be successful. But without the threat of violence, student-borrowers could have chosen to do something else–work for a few years to save up for tuition, attend low-cost community college, study on their own, or forgo college altogether.

Unless under the threat of violence, it is unfair to say that a student-borrower was “forced” to get a loan, and thus should be allowed forgiveness when trying to pay it back. Banks are thus doing no more than giving young people more options in deciding how to fund their college education. In turn, they empower some to attend college who may otherwise have never been able to afford it.

There is probably a lot more that can be said, but I’ll leave that for another day. The moral of the story: Banks are, indeed, the student borrower’s best friend.

(It is worth noting that there are many banks who engage in fraudulent expansion of their loanable funds, and thus do harm students in the long run. In this post, however, I am only speaking of banks who hold true to their guarantees and do not loan money they do not actually have.)

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