Millennials like socialism. It’s no secret that many of them vote for “democratic socialists” such as Bernie Sanders, and a 2019 poll found that “45% of Generation Z and Millennials believe that ‘all higher education should be free.’” This trend includes a fair number of Catholics, who, as Brianne Jacobs wrote for America in 2018, feel that the existing economic order and its persistent inequality is “making it hard to own a home, get married, have children or pay off student debt.”
Jacobs and millions like her point to a real problem: birth rates are down, including among Catholics, and student loans are a heavy burden that contributes to that decline. Young people often feel gypped by a society that told them college was the only foundation for financial security, only to let them graduate at the bottom of a $100,000 hole. But are socialist policies such as tuition-free college and student loan forgiveness—which would ultimately transfer the costs onto other taxpayers—the correct response? Does the vast Catholic intellectual and moral tradition suggest more just and effective ways to solve the problem of student loans?
Loans and usury
Catholic teaching on loans is primarily focused on usury and whether or when it is acceptable to charge interest on loans. Although countless Church documents and saints have condemned usury as a mortal sin, there is some difference of opinion on what exactly usury is. Two main views prevail. Both views concern whether it is ever morally licit to charge interest on a mutuum. Mutuum is a Latin word that means a loan of a fungible or consumable thing. Literally, it comes from the words “meum tuum” or “mine yours,” because the nature of such a loan is that the borrower takes ownership of the specific units “loaned” and personally promises to pay back the same amount and type of thing instead.
Think of borrowing eggs versus borrowing a book. If I borrow a book from my neighbor and fail to return it, she could theoretically come over and take the book back. This is not a mutuum; her book does not become mine. If I borrow two eggs from my neighbor to bake a cake, those specific eggs become mine; my neighbor can’t repossess the same eggs if I fail to repay her, because I have cracked and eaten them. Instead, she simply hounds me to repay her with two other eggs. This is a mutuum. And it would be the same if my neighbor lent me five dollars; I would spend the five dollars and repay her later with different dollars.
In modern terms, we might call this a full-recourse loan or simply a personal loan. This is different from other types of contracts that might appear to be loans, such as a mortgage or a business investment, where an object—a house, land, or part of a business—is being sold or rented in some way, so the Church does not consider them when speaking of usury. However, student loans fall under the definition of a mutuum: a lending institution lends money to a borrower who will spend it on college, then pay it back later, generally with interest. And this leads us to the question of whether charging that interest is morally acceptable.
One view, which I’ll call the “strict” view, holds that it is always gravely morally wrong to charge interest on a mutuum. This view is supported by, among others, Aquinas. In De Malo, he explains:
But regarding the things whose use consists of consuming them, the use of the thing is only the thing itself…. Therefore, when a person lends money with the stipulation that the entire sum be returned, and the person in addition wants to have a fixed recompense for the use of the money, the person evidently sells separately the use of the money and the very substance of the money. And the use of money is only its substance, as I have said, and so the lender of money at interest sells nothing or sells the same thing twice, namely, the very money whose use consists of its consumption. And this is evidently contrary to the nature of natural justice. And so lending money at interest as such is mortal sin. (Thomas Aquinas, De Malo, Q. XIII art. 4c; emphasis mine)
A prolific Catholic blogger, who went by the pseudonym “Zippy” during his too-short life, sums up Aquinas’s view succinctly, saying, “Aquinas compares [charging interest] to attempting to sell wine and the consumption of the wine as two separate things.” Applying this to student loans, we could say that lenders who charge interest are selling money and the spending of money as separate things, which is inherently unjust.
Although different arguments for it were proposed through the ages, Aquinas was far from alone in his basic view that charging interest on a mutuum was per se unjust. A fifth-century document called Ejiciens, which was incorporated into Gratian’s 12th-century Canon Law, had already stated that money could not be leased in the same way as a house. This, the author argues, is because money is useless until you need to spend it: a lender is just as well off whether his extra cash is in the hands of a borrower or under his mattress. To charge “rent” on money is to charge for nothing. And, as late as 1745, Pope Benedict XIV issued the encyclical Vix Pervenit, which stated clearly that charging interest on a loan (mutuum) is a sin, even if the amount of interest is low.
Lastly, the aforementioned Zippy—whose strange pseudonym was used only to protect his family’s privacy and should not lead anyone to discount the weight of his arguments—also emphasizes the personal guarantee inherent in a mutuum and says that this “makes usury fall into the same genus as slavery.” It sounds extreme, but let us follow the logic. Lending for the sake of interest is an attempt to invest in a person the way one would invest in a property or business. It claims a right to the fruits of the borrower’s future labor, beyond what was lent. This objectifies the person and is akin to slavery.
With student loans, this point is very clear: a lender invests in a borrower’s education, expecting to gain back the cost of that education plus more when that borrower finishes his degree and (hopefully) gets a job. But, to invest in a person’s education and expect to profit from the person’s work is the same as investing in a person and expecting profit from a person. The education cannot be repossessed if the borrower defaults; his work cannot be separated from himself. Though admittedly in milder form, this is similar to how someone who buys a slave attempts to invest money in a person in order to benefit from that person’s future work.
So, the “strict” view holds that charging any interest on a mutuum is gravely sinful because: 1) it violates the natural law by trying to sell nothing, or sell the same thing twice, 2) the view that it is sinful has been confirmed repeatedly in saints’ writings and Church documents, notably Vix Pervenit in 1745, and 3) according to one recent author (“Zippy”), usury, in a sense, attempts to objectify and enslave the borrower. In this view, student loans should only be provided as an act of charity, interest-free.
The other view, which I’ll call the “developed” view, holds that usury is a sin of charging interest on a loan beyond what the lender is actually entitled to. In fact, this is also the “strict” view, as we shall see. But the difference between this and the other view is that the “developed” view emphasizes two major developments that influenced Catholic thought regarding what might justify the lender charging something above the principal.
The first development is that of what were called “extrinsic titles.” Many saints and Church documents in the late medieval period acknowledged the justice of extrinsic titles: circumstances extrinsic to the loan itself that entitled the lender to something beyond the principal. Even Aquinas acknowledged that a borrower owes the lender compensation if he fails to pay the loan back on time, thereby causing loss to the lender (De Malo, Q. XIII, art. 4c, ad. 14).
Second, the economic changes of the Commercial Revolution caused money to shift from being simply a sterile means of exchange to being used as capital—something that could always grow by being invested in a useful venture. Dr. Samuel Gregg summarizes this historical shift, and the many exciting economic possibilities that flowed from it, in his 2016 book For God and Profit: How Banking and Finance Can Serve the Common Good. (Dr. Gregg generously supplied me with an electronic copy for this article.) This growing, early-capitalist economy, combined with the concept of extrinsic titles, prompted Catholic thinkers to propose various situations in which collecting interest—which is literally Latin for “is between” or “the difference”—might be justified.
One proposed title related to the high probability of rising prices, which, in aggregate across a whole economy, equals inflation. Gregg notes that Pope Gregory IX’s 1234 decretal Naviganti, “stated it was permissible to charge a higher price where payment was being deferred over time if significant questions existed concerning the good’s future price.” He continues:
“The implications of this statement for charging interest were considerable. It suggested that a seller of money might be entitled to indemnify himself against the risk that a price rise might occur between the time of the loan and the time of the loan’s repayment. It also indicated that if the lender is entitled to receive back the full value of what was given at the time of the loan, more units of money might have to be paid back in the future.” (p. 53; emphasis mine)
This gives us an obvious reason why interest on student loans might be permitted. College tuition costs typically go up every year, and/or the value of the dollar goes down. Given this, a student who pays for his education several years after receiving it should pay the current price of that education, and/or return more dollars than he received in order to return the same value. Charging an interest rate equal to the inflation rate allows the lender to break even.
But lending institutions are not usually in the business to break even. Another title, proposed by the great 13th-century canonist Hostiensis, was known as lucrum cessans, or “profit ceasing.” John T. Noonan, in his extensive book The Scholastic Analysis of Usury, notes that Hostiensis was the first to propose that interest was due from the beginning of a loan, rather than as a late fee or compensation for damages. Hostiensis suggested that a merchant, “who is accustomed to pursue trade and the commerce of the fairs and there profit much,” might make a loan to a needy neighbor, and could then ask for compensation for the lost profits he would have made by using the same money in his business (Noonan, p. 118, quoting Hostiensis).
Adherents of the developed view understand lucrum cessans as the beginnings of the concept of opportunity cost: the idea that a lender deserves compensation for the profits he could have received had he invested his money elsewhere rather than lending it. In the new, growing economy, anyone could invest his money in legitimate business and receive gain, and this is even more true today, in the era of Robinhood and the stock market.
How does this apply to student loans? A lender could invest $100,000 into the stock market for four years and expect to make a profit on it, but instead, the lender lends the money to a student to pay for college. The student owes the borrower some compensation for those foregone profits.
Lastly, the developed view points to the Church’s pastoral approach to the issue of usury as shown by some decisions of the Holy Office in the early 1800s. Many documents, including Vix Pervenit, stated that usurers had to make restitution of the money they had gained through usury in order to be considered repentant and admitted to the Sacraments. However, there was much confusion about what types of contracts were usurious and which could give rise to legitimate profit, especially if civil laws allowed for some interest to be taken on a loan.
Bishops submitted questions to the Holy See, asking whether confessors could absolve penitents whose contracts were questionable under Vix Pervenit, and the Holy See responded with several decrees. These decrees essentially stated that confessors could absolve any penitent who was sincerely willing to submit to any future judgment of the Holy See, even without making restitution or changing his doubtful business practices.
These decisions, combined with the relative silence from the Magisterium on the specifics of usurious contracts in the nearly two centuries since then, imply that perhaps charging interest on a mutuum is not always inherently wrong, as the strict view argues—or, at least, that there are so many just titles to interest that most contracts that are civilly legal can be presumed to be non-usurious. Gregg writes of the 19th-century decrees, “The working assumption was that the loan was just, and usury the exception rather than the rule” (p. 65).
To sum up the “developed” view: usury is the sin of taking interest where the lender is not entitled to that interest. However, many just titles to interest have been proposed, allowing lenders to charge interest to make up for inflation and even the loss of the potential profits they could have made elsewhere. The Church implicitly acknowledged the justice of charging interest in many scenarios and the complexity of the whole situation by declaring that penitents suspected of usury could be absolved as long as they were open to the judgments of the Holy See. Because of this, charging a reasonable, legal rate of interest on student loans is perfectly justified.
Complexities and practicalities
If we take the “developed” view, we might still recognize that the burden of student loans is a practical problem, but we will not be able to use Catholic teaching on usury to lighten that burden at all, not even by the weight of the 3-15% interest rates typical of our time.
However, the “strict” view makes some objections to the “developed” view that are worth our attention.
First, those pastoral decrees in the 1800s were just that, pastoral. As we all know, pastoral decisions can be either practical and reasonable or problematic. The Holy Office probably took the best practical step at the time; the cardinals couldn’t review every possible type of contract and declare it to be usurious or non-usurious. Plus, the questions they received show that there was still considerable confusion in the lowest ranks of the Church about what was and wasn’t usury according to Vix Pervenit. Zippy points out:
Aquinas and the Popes who addressed the issue in bulls and encyclicals may have understood the difference between non recourse (societas) investment and full recourse (mutuum) loans, but many priests at the parish level did not. The spectacle of a penitent, innocent of usury, hounded and denied absolution by an overzealous confessor who doesn’t properly understand the subject, may be a risible fiction now; but that was not always the case. (“Usury FAQ,” question 29)
Zippy also makes an argument against charging interest to cover inflation, relating it to his point about slavery and investing in people. He notes that all property (including money) is always subject to decay (e.g. inflation) and always requires some amount of work to maintain its value. A house needs repairs to preserve its value; money must be combined with work in order to maintain its value in an inflating economy.
An investor may invest his money in a business or property to maintain its value amid inflation, but if a lender charges interest on a mutuum to maintain his money’s value, he profits from the borrower’s labor. He does this without paying him, too, because he demands the whole principal and interest back. If the borrower exchanges his wealth-maintaining work for a loan, it is not really a loan anymore, but a way of getting free work out of that borrower.
This leaves the issue of lucrum cessans and opportunity cost. The shortest objection to the “developed” view here is to point out that lucrum cessans and opportunity cost are not the same thing. When Hostiensis suggested that a lender could charge for foregone profits, he severely limited the scenario by saying the lender had to be a merchant habitually engaged in trade, and not habitually a moneylender. In other words, the lender had to have real grounds for claiming that he almost certainly would have made a profit by using that money in his business.
Let us take a modern example. Suppose Mary knits scarves and sells them online for $30 each. She spends $20 on yarn and $5 on shipping per scarf, and collects $5 profit. A friend comes to her and asks for a loan of $100. Mary takes the $100 out of her yarn-buying fund and calculates that, because she would have bought yarn for five scarves with that money, her friend owes her the $100 back plus $25 to cover the profits that almost certainly would have resulted from the five scarves that never were. This is obviously not the same as if I, who cannot knit, lent $100 of my personal money to a friend and claimed that I could have made $25 profit by selling scarves. And it certainly is not the same as a financial institution, which can freely invest its money anywhere, choosing to lend to a student at interest.
The words almost certainly are also quite important, because profits in business are never completely certain. In a real sense, Mary is not so much lending money, as selling her friend five scarves that don’t exist (and kindly giving her free shipping). Aquinas backs this up: “But the lender cannot enter an agreement for compensation, through the fact that he makes no profit out of his money: because he must not sell that which he has not yet and may be prevented in many ways from having” (Summa Theologiae, II-II, Q. 78, art. 2, reply to objection 1).
Aquinas also bluntly points out that, if a lender considers that he would lose anything by lending, he should choose not to lend—or at least, not hold the borrower accountable:
[W]hen the borrower returns the money lent within the specified time, … the borrower is not obliged to pay compensation, since the lender ought to have taken precautions against loss to self, and the borrower ought not incur loss regarding the lender’s stupidity. (De Malo, Question XIII, article 4c, reply to objection 14)
Lastly, in case anyone objects that the borrower freely agrees to the interest payments, I answer that many, many people consent freely to things that will harm them. God’s law, as we know well from the sexual realm, does not lean solely on human consent; rape is a mortal sin, but so is consensual fornication. Besides, most 18-year-old college students agree to their loans under a sort of duress, thinking that student loans at interest, and college in general, are the only way to move into successful adulthood.
In short, without any disrespect to the authors above from whom I have learned so much about the “developed” view, I firmly believe that the strict view wins. It is more internally logical and takes a more precise view of the Church documents. It is, like so many moral truths, a “hard saying,” but only because we have become so accustomed to its opposite. Catholics who are involved in finance should glorify God and gain just profits by making legitimate investments in businesses and property. But they should do whatever they can to prevent the charging of interest on mutuum loans, including student loans.
Further challenges and questions
But what about the rest of us who do not work in finance or banking? What effect would a ban on student loan interest have on society?
First, no lending institution would want to provide student loans without making a profit, so private student loans—except for a few interest-free loans from charitable institutions—would disappear. Two possibilities then arise. First, the government might fill the gap, offering more of its own low-interest or no-interest student loans, or funding more free college, thus shifting the burden from a student loan burden to a tax burden. In this scenario, we’re no better off.
But our hypothetical government that just outlawed interest on student loans because of a strict interpretation of Catholic usury doctrine seems unlikely to take this socialist approach. Suppose the government did not fill the gap?
Student loans would become more scarce. It would become harder for the average high school graduate to go to college. Scholarships, grants, and charitable loans would likely go to students who particularly merit them and/or have an interest in specific causes. (For example, a donor with an interest in cancer research might provide a loan to sponsor a student who hopes to enter the oncology field.) College would practically be limited to those students who showed enough intention and capacity to merit charitable aid, or whose parents could afford to pay for college outright: the very smart and the very rich.
This might have good effects—reducing the number of students who attend college with no apparent intentions besides drunken frivolity—or bad effects—preventing those who were smart, but not quite as smart as the scholarship winner, from having any chance at the education and career they had hoped for. Because most companies think anyone without a bachelor’s degree is incapable of anything above minimum-wage work, many of those not rich enough to pay for college and not lucky enough to get charitable financial aid would simply stagnate in low-paying jobs for life. They would be just as incapable of financial stability for themselves and a future family as college-educated adults today are with their debt. Again, perhaps we are no better off.
But perhaps the market would adjust. Perhaps creative ways of funding education would come into existence that do not involve profiting off a mutuum. Businesses who found themselves lacking qualified, educated workers might pay to educate such workers. Large companies such as Amazon and Publix already have on-site classes or tuition reimbursement benefits to help entry-level workers expand their careers; other companies might imitate them. Perhaps apprenticeships in the trades and even some professions could make a comeback. Perhaps colleges with dwindling enrollment would find creative ways to reduce tuition costs: expanded work-study programs, for example. Perhaps, even, our hypothetical government might help to improve high schools so that college is not so crucial for a comfortable life.
My thought experiment contains many layers of “perhaps.” I confess that the final scenario—no interest, no government loans, no tax increase, and a lot more thrift, practicality, and charity—appeals to me the most, and yet seems the most far-fetched. But if my scenario is impossible, Catholics must propose a better one, and soon. As so often happens, the world is asking the right question—how can we help those who are struggling to pay off student loans and enter financially stable adulthood?—and giving the wrong answer—bloated, socialist government policies. The Church must provide the right answer, for the good of Catholics and everyone else.
If you value the news and views Catholic World Report provides, please consider donating to support our efforts. Your contribution will help us continue to make CWR available to all readers worldwide for free, without a subscription. Thank you for your generosity!