Vista Equity Partners Chairman Robert Smith made quite a splash over the weekend when, during a commencement speech at Morehouse College, he pledged to pay off the student loan debt of every member of the class of 2019 who had accrued a tab.

Smith is worth $5 billion, so he can afford to be generous. In fact, he’s the richest black person in the U.S. – richer than Oprah Winfrey.

We don’t know exactly how much this will cost the philanthropist,  but those watching expect the pledge to cost the man around $40 million. That would make the tally 0.8% of his wealth… like a millionaire giving away $8,000.

That’s not meant to diminish Smith’s gift. This particular piece of generosity is part of his much larger plan, through the Giving Pledge, to donate at least half of his vast net worth during his lifetime.

And how he does this is his business. He made the money…. took the risks… earned the education. And he needs no advice or input from me or anyone else. He could give it all to the Pet Rock Society.

It’s great that he’s chosen education…

But student loans for graduates? He’s missing the biggest point of pain for students…

The Biggest Point of Pain

When it comes to student loans, there are three distinct groups:

  1. Those with big loans…
  2. Those with moderate loans…
  3. And those who take on smaller loans.

You might believe that the big loans hurt the most, but that’s not true.

The largest student loans often go to those with graduate degrees, like doctors and lawyers. People pursuing those professions typically rack up between $100,000 and $250,000 in student loan debt, wildly skewing the average numbers. But on the flip side, their career earnings end up being high enough to pay the loans no problem.

The middle group tends to encompass most graduates who earn bachelor’s degrees. They have loans around $30,000, which often takes 20 to 25 years to pay off, making it a drag on their financial situation. But the degree allows them to earn more.

The Pew Research Center reports that Millennials with a college degree earn $56,000 on average, compared with those who hold just a high school diploma and take home $31,000. Those numbers would seem to make the collegial investment worth the price.

It’s the last group – those with small loans – that tend to feel the most pain. Not because of the size of the loan, but because so many didn’t actually graduate from college.

Including community colleges, the dropout rate for higher education is greater than 50%. Without community college, it’s still above 30%. Many of those students took out loans, but then didn’t complete their degrees. This leaves them with debt, and yet no better earning potential. Because the loans are so difficult to discharge, they follow these people throughout their lives, weighing on their financial situations.

If Mr. Smith wanted to lift an incredible burden off the backs of a specific group, he could have sought out those who borrowed to attend Morehouse but never completed their degrees.

This might sound like it’s rewarding failure, but let’s remember the goal, which is lifting a burden.

And there’s no doubt that even Mr. Smith’s generosity is an act of favoritism.

An act of favoritism…

He paid off debts; he didn’t grant all class members a financial stipend.

What about those who worked instead of taking on debt? Or those parents who saved instead of spending on themselves, and used the funds to put their kids through Morehouse with no debt? And what about the students who excelled in high school and earned scholarships?

They were just told that their efforts were wasted. They should have spent their time and money on themselves and maxed out their loans, because all would be forgiven.

And what about the university itself? This isn’t meant to pick on Morehouse, since almost all universities fit the bill. The institutions have added staff over the last 20 years well beyond what was called for by enrollment, growing their costs and passing it on to students.

Education shares a sad characteristic with the government: It’s one of the few areas in which technology didn’t make things cheaper. In other industries, technology made things much cheaper.

That’s because colleges don’t need to think about cost cutting. Their constituents are encouraged to borrow five-digit sums to buy their goods, and can do so from the federal government with no credit check, and no estimate of future earnings.

The system is broken…

The system is broken, and we can’t fix it by looking at the end of the process. We need to attack it at the beginning, dramatically curbing or ending student loans before they start.

We can only hope that the students of Morehouse who benefit from Mr. Smith’s generosity accept his challenge to them, which was to pay it forward.

Let’s hope the best and brightest of them, those on scholarship without loans who didn’t benefit from his largesse, choose to do so as well.

Perhaps they’ll be the group that figures out how to break the chokehold that universities have on the education system.

Rodney

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Rodney Johnson
Rodney works closely with Harry to study the purchasing power of people as they move through predictable stages of life, how that purchasing power drives our economy and how readers can use this information to invest successfully in the markets. Each month Rodney Johnson works with Harry Dent to uncover the next profitable investment based on demographic and cyclical trends in their flagship newsletter Boom & Bust. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. Along with Boom & Bust, Rodney is also the executive editor of our new service, Fortune Hunter and our Dent Cornerstone Portfolio.