The Road To Absurdistan: Student lending psychology and bizarre incentives
Updated: Nov 24, 2022
This imaginary home financing narrative takes place in an alternate world called “Absurdistan.” This story helps relate the hidden psychology of U.S. student loans (called “salience bias”), hidden disclosures known as "sludge," and other bizarre U.S. student loan program incentives. Our imaginary journey applies current U.S. student loan rules to a pretend home-buying program.
Please note: We discuss salience and related college concepts in our article The College Stoic: The Stoic's Arbitrage and making a great college decision.
Imagine you are buying a house in Absurdistan. The Absurdistinian government provides loan program support. Their loan program communication goes something like this:
"Hey there, homeownership is important and the Absurdistinian government is here to help you! We like you so much that we are not even going to check your credit. So whether you buy a less expensive starter home or an expensive luxury home, we will provide the loan to get you into almost any home. You will qualify for almost any home, other than a very few found in selective neighborhoods. Pick the home you like the best! For your parents or other loved ones, after you decide on your home, they can even get cool neighborhood sweatshirts! They may proudly wear their neighborhood swag. We like you so much, you don’t have to start repaying the loan for 4.5 years! Or even longer if you have a good enough reason. You just have to promise to get a good enough job to start repaying the loan at some point. No problem…. we trust you to figure it out.
There is a catch. But hey, this may occur so far in the future, we are not sure you should worry about it. But just in case you want to read the fine print:
**** Warning, boring fine print, no need to read *****
Once you start repayment, you must continue. It will take you decades to climb out of debt. Because you fear the possibility of losing income for making loan payments, your job mobility will likely decrease. The long-term negative financial impact on your retirement is likely massive. For protection from stress-induced teeth grinding, we recommend you get a mouthguard.
However, not making loan payments is even worse. If you do stop repayment, your credit will be wrecked, you will be relentlessly hounded by collection agents, and you are not even eligible for bankruptcy relief.
Oh, and one last thing, the price of Absurdistinian housing will increase tremendously because of our loan program. Competition between home builders is intense! You would think competition would drive down home prices. Not in Absurdistan! In this bizarre world, competition causes prices to go up! Instead of home builder competition driving cost efficiency, our loan program causes an explosion in costly amenities. The home builders will even start football teams as a way to increase home sales. They pay the football coaches $millions! Who doesn’t love football!? But really, can you blame the builders? The Absurdistinian government guarantees that all builder cost increases will be covered by matching loan program increases. So lock in lower housing costs while you still can! You should look forward to having fun at the football game! You have mortgaged your future for it.
Good luck and remember - we like you!"
Our story may leave you thinking “Wow, this is messed up. How the heck did we get to such an absurd world? More importantly, how do we change this absurd world?!”
To address the ”how do we change?” question, please see our article Higher Education Reimagined. We present a potential higher ed future. This future world vision is grounded in the academic purpose of higher ed, plus the vision utilizes modern technology, the latest teaching methods, and leverages efficiency-enabling market platforms.