When you are 18 and offered “low-rate” loans to pay for school with no interest until graduation, it’s hard to see the long-term impact of taking this kind of debt on.

Financial institutions are well aware of people’s sparse knowledge of finance and have been capitalizing on the gaps of knowledge for generations. Bear in mind, many professions are built upon the gaps of knowledge between client and professional.

Let’s look at a meeting with a student loan officer and break down the thought process:

Banker

This student is 18 and fresh out of high school with a decent GPA and great extracurriculars, they are a hardworking asset – willing to continue to work hard and pay their debt for years to come as a AAA-rated security.

Student

The bank is offering money at low-rates with no interest until graduation, no payments until 6 months after graduation? It’s true that going to college opens doors, if money to pay for school is this easy to get, imagine how easy money will be to get when I have a high-paying job earned by my degree in a few years! Things are looking up.

The banker has minimal risk while the student is taking on much of the risk for being on the hook for a healthy monthly premium. Here is where the misalignment of interest lie: educational institutions do not guarantee employment post-graduation, but banks do guarantee interest to begin accruing on student loans post-graduation.

Lack of financial education is the number 1 leading cause of economic crises. Banks profit on the short-term gain at the expense of consumers not considering the cost of long-term losses. The key to keeping assets “properly managed”, however, is to make sure the consumer is still able to make the agreed upon payments for the life of the loan, otherwise assets risk becoming liabilities. The bank does not enjoy liabilities, just like any business; but the way they handle their liabilities, aka “non-performing” assets, is that they dump them to collection companies at a discount to cut their losses.

Remember how banks and homeowners faired with sub-prime mortgages in ’07-08?Banks were bailed out, homeowners were hung out to dry and lost their homes.

Now how are banks and students fairing with sub-prime student loans in ’18-19? Banks are getting fat, administration at universities is getting fat, and students are barely getting by with student-debt laden credit history and are stuck renting for the next several decades. As for speculation, banks will most likely be bailed out, as the next generation of the labor force will be left out to dry and lose their ability to buy their forever homes.