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3 Unintended Consequences Point Out How Robert Smith’s Honest Gift to Pay Loans Neglects Duty to Students’ Best Interest – A Lesson In Fiduciary Duty

3 Unintended Consequences Point Out How Robert Smith’s Honest Gift to Pay Loans Neglects Duty to Students’ Best Interest – A Lesson In Fiduciary Duty
May 29
00:03 2019

No good deed should ever go unpunished. Without a doubt, billionaire Robert Smith’s surprise announcement to the Morehouse class of 2019 to pay off the entirety of their student debt rank among the most impressive display of giving ever demonstrated. According to a USA Today report, Smith, who signed on to the Gates/Buffet “Giving Pledge, is promising to pay $40 million.

The act of kindness generated enormous publicity for Smith, Morehouse College, and the plight of those burdened by student debt.

But is this generosity in the student’s best interest? It is possible the feat may lead to unintended consequences that can harm the long-term welfare of those students. Here are three potential ways forgiving college loans can neglect the students’ best interest. Read them to understand how even when done with the best intentions, making life easier for others doesn’t always run consistent with the fiduciary duty to look out for their best interests.

Unintended Consequence #1: It may overshadow the real issue of college debt
A recent article explains how college debt can destroy the student’s chance for a comfortable retirement. There’s absolutely no question we are in the midst of a college debt crisis and something must be done about it. Smith’s heroic act may merely provide the temporary dopamine of a quick fix that may distract us from finding a more universal long-term solution to this problem.

“Robert Smith’s pledge is awesome,” says Josh Hastings, Personal Finance Writer & Student Loan Expert for based in Washington, D.C. “The real issue, though, is that it’s not a billion-dollar crisis but a 1.6 trillion-dollar crisis. Every little bit helps, however at the end of the day there are just too many borrowers and too much debt. The unspoken student loan issue is the advice high school student receive: Go to school at ANY cost. Students already have the misconception their student loans will be forgiven according to a LendEdu survey, so billionaire bail outs might increase this misconception.”

While the nation gives Smith his well deserved kudos, it also offers the chance for those most responsible for this crisis to sneak back into the shadows. “The culture of debt is the issue and Robert Smith’s gesture, while very commendable, does not help to alleviate to root cause of the problem,” says Rob Reilly, Chief Investment Officer at Sandy Cove Advisors in Hingham, Massachusetts. “The problem, as I see it, is caused by a failure of our politicians (on both sides of the aisle) to limit the debt fuel that leads to continually higher education costs.”

It’s not just the politicians. There’s plenty blame to go around regarding college debt. Robert Smith, though, isn’t one of them. “He is a role model to other billionaires in that he used his wealth to directly affect 400 students in a positive way,” says R. Brad Knowles, Managing Director at Heritage Retirement Plan Advisors in Oklahoma City, Oklahoma. “His generosity directly affected the next generation of leaders in business and politics. Ideally, the generosity they received would be paid forward in one way or another to someone else in the future. His gift could backfire by taking focus away from a broken system that needs to be fixed, for example: loan servicing companies. It would also overshadow the Federal student loan forgiveness programs for public sector work that need more oversight.”

In fact, Smith’s move might open the gates to more wealthy donors doing more to proactively alleviate college debt. “At this juncture, Robert Smith’s move is an excellent model for other billionaires and multimillionaires to follow,” says Kyle Winkfield, President of Finley Alexander Wealth Management in Rockville, Maryland. “So many billionaires and millionaires donate to the actual institution and I get it. Maybe because they want their name on a building etc. Here’s the deal: what if you could make the same donation and have it go to a fund to either relieve the student loan debt of graduates and or go to reduce the overall out of pocket cost for anyone who attends your alma mater?”

More college at a lesser cost equals less debt. That certainly sounds like it’s in the best interest of all college students.

Unintended Consequence #2: It may enable a tendency to take on personal debt in other areas
A parent may often see a child struggling with high credit card debt. The parent, hoping to help the child, pays off that debt so the child is debt-free. Months later, however, the child has once again accumulated a large credit card bill.

Did the parent act as a fiduciary would, or did the parent merely enable bad behavior? That’s the risk posed by Robert Smith’s bold and selfless move. “He is a role model in a way for other billionaires in that he did not go to Morehouse, but sees that those students who already face a wealth gap issue can now be in a better position financially,” says Ja’Net Adams, owner of EMACK Consulting, Winston-Salem, North Carolina. “The only way it can backfire is if those now debt free students don’t understand money. I graduated debt free also and still ended up in $50K of debt. These graduates are like any other student who graduated debt free after being on academic or athletic scholarship.”

Worse, by giving those students with debt his fatted calf, Smith may unintentional anger the hard-working self-disciplined prodigal sons who labored to earn a degree without incurring debt. Greg McBride, Chief Financial Analyst at in Palm Beach Gardens, Florida, says, “Imagine how the students sitting in the audience that sacrificed by working one or two jobs and eating ramen noodles, or the parents that scrimped and saved for 18 years in order to avoid college debt feel.”

What message does this gift of loan forgiveness then send? “Other college students might fall into the entitlement mentality and simply think that someone will eventually come along and solve their debts for them,” says David Bakke, College Expert at Money Crashers in Atlanta, Georgia.

It’s not hard to imagine the worst-case scenario should Robert Smith’s action become the norm rather than the exception. “Mr. Smith’s pledge to pay student loans is a wonderful gift to those students,” says Tim Parker, a Partner at Regency Wealth Management in Ramsey, New Jersey. If this generous gift were to proliferate, students could take on even more debt than planned with the hope that someone someday will pay it off, either a billionaire or perhaps the federal government.”

It’s never in a person’s best interest to develop a dependency on third parties. It’s always in their best interest to learn how to fend for themselves. Living a self-sufficient lifestyle has been an American tradition going back to the days of the pioneers in the new frontier.

Financial independence for all individuals is not just an honorable goal, it’s in the best interest of those individuals, and beyond. It helps keep our society progressing to still greater accomplishments. Sometimes, however, the first step to such independent is taking on debt. Which leads us to…

Unintended Consequence #3: It removes a worthy incentive to excel independently (and other positive life enhancing financial behavior)
Many folks abhor debt. This isn’t a bad thing, but it may be too extreme to believe you can go through life without incurring loans. Debt, therefore, shouldn’t be avoiding, it should be managed as part of one’s broader financial affairs. It’s like learning how to shoot a gun. You hope you’ll never have to use that knowledge (except for hunting or sport), but, if the situation arises that demands active use of that knowledge, at least you know you’re prepared.

Debt, then, becomes a steppingstone to financial health. This isn’t just a theory, it’s a practical necessity. Showing you can pay your bills on time improves your credit score. “I think a little skin in the game is helpful…a little bit of debt 10-40k is reasonable for college graduates to tackle. Paying that debt down over time helps build their credit,” says Winkfield.

Certainly, a higher credit score is in the best interest of the student.

Taking on debt also acts as a subtle spur to succeed. How many times have we heard stories of poor kids excelling in college while rich kids party themselves out of school? Winkfield says, “Knowing ahead of time that while you are in school you are racking up a bill keeps the motivation to do well and graduate on time (4-5 years) and get a job much higher than if mommy or daddy or a wealthy benefactor is covering the bill upfront regardless of how the student performs.”

Without a doubt, earning a bigger salary is in the best interest of the student.

A sense of entitlement thwarts the independent initiative we need to succeed. Robert Smith’s altruistic offer may backfire if, rather than leading to the financial independence he hopes for, yields instead a privilege mentality that sucks the life out of a community. To prevent this, Smith may want to consider to add some strings of incentive to what appears to have been an unconditional offer.

“Academic scholarship recipients are held to a minimum standard,” says Winkfield. “I think that if this model that Smith is pioneering takes hold some standards need to be in place for those graduates to qualify for student loan payback. The backfire happens when the person(s) sponsoring the program sees one or two ungrateful students or students, in general, act entitled. This just breeds a character trait that isn’t helpful in the next generation. At the moment, I think all graduates with student loans will not come anywhere close to ‘entitlement’ issues.”

It’s always in your best interest to believe you are responsible for making your own success.

Finally, there are some who think Smith’s one-off gift may harm other fundraising efforts to sold broader issues that impact society as a whole, not just college students. “Robert Smith shared his excess wealth in a display of generosity which might encourage other billionaires to do the same – this is classic Carnegie philanthropy,” says Rochelle Burnside, Chief Student Debt Editor at in Pleasant Grove, Utah. “However, philanthropy has unintended consequences. Donations to universities and institutions receive ample publicity and are the most common donation type, but it overshadows opportunity to donate to foundations for poverty alleviation.”

No matter how you feel about the repercussions of Robert Smith’s pledge to forgive the loans of the entire Morehouse class of 2019, it remains evident that those students have just won a lottery of sorts. Like all lottery winners, what happens next will reveal the content of their character.

And possibly reveal the ultimate fiduciary lesson: the value of the lottery itself.

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on TwitterFacebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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