The complicated beauty of student debt forgiveness, according to the CEO who cleared the loans of nearly 400 Morehouse grads

Vista Equity Partners CEO Robert Smith speaks with CNBC from Davos
Vista Equity Partners CEO Robert Smith speaks with CNBC from Davos

In May 2019, Robert F. Smith, founder and CEO of private-equity firm Vista Equity Partners, gave a commencement speech to Morehouse College's graduating class. Then, the billionaire announced that he and his family would pay off the roughly 400 graduating seniors' student loans — as well as loans taken out by students' parents and guardians.

The total gift of roughly $34 million brought the crowd to their feet and sparked a conversation about student debt, college affordability and Historically Black Colleges and Universities like Morehouse.

At the 50th World Economic Forum in Davos, Switzerland, Smith spoke with CNBC about the economic and philosophical principals behind his decision.

"Capitalism still is the most efficient system on the planet for uplifting humanity generally," he said. "But of course, in general, we go up, but we have individual pockets that don't necessarily participate. African Americans have traditionally not participated," he said, pointing to the Homestead Act, the Southern Homestead Act and redlining as examples of how African Americans have been kept from gaining generational wealth through land ownership.

Student debt, says Smith, would likely have forced the Morehouse graduates to delay buying a home and participating in this system of creating wealth.

Billionaire Robert F. Smith announced that he would be paying off the student debt of the entire 2019 graduating class at Morehouse University.
Marcus Ingram | Getty Images Entertainment | Getty Images

Indeed, research has found that student debt is forcing borrowers to delay buying homes. A 2019 survey by TD Bank of more than 1,000 Americans between the ages of 18 and 39 who paid off or are currently repaying student loan debt found that 36% say they have delayed buying a home because of student debt.

Marco Di Maggio, a professor at Harvard Business School, said Smith's generosity will have significant financial implications for the Morehouse students. He cited his own research that tracked 10,000 people who had their private student loans discharged and found that the borrowers increased their salaries by $4,000 over three years and carried less debt overall after they no longer had to make student loan payments.

But beyond these economic logistics, Smith said his decision ultimately came from his personal philosophy about freedom.

"The whole inspiration really comes from an ideological position around how do you liberate the human spirit. I don't think there's anything more beautiful than the liberated human spirit," he said, asking himself, "What's a good way to liberate 400 spirits 400 years after 1619?" in reference to the 400-year anniversary of the arrival of the first African slave in America.

Smith said he was overwhelmed by the response he got from students and their families after his donation. "It was one of the most beautiful expressions I've ever seen of the human spirit, liberated en masse," remembered Smith. "It was wonderful."

Billionaire to pay off all Morehouse graduating seniors' student loans
Billionaire to pay off all Morehouse graduating seniors' student loans

But when it comes to proposals put forth by politicians for the government to forgive student debt, Smith stressed that the subject is "complicated."

"There are some folks that have college debt for 20 years, and if you forgive the past, what about the future?" he said.

Smith revealed that he is working on a not-yet-announced initiative with former Internal Revenue Service commissioner Fred T. Goldberg to eliminate the student debt burden for all African Americans who study science, technology, engineering and mathematics at HBCUs going forward — but would not help those who took on debt in the past.

"Is it fair to them? I don't know," conceded Smith. "So government can do some things in the past. The question is what do we do for the future? Or you can do things for the future, but what do you do for folks in the past with that burden?"

To be sure, many politicians who have proposed student debt forgiveness have suggested both forgiveness for those who took on debt in the past, as well as proposals to make sure students don't take on debt in the future.

Sen. Elizabeth Warren has proposed cancelling up to $50,000 in student loan debt for every borrower with a household income of less than $100,000. Her plan also includes eliminating tuition and fees at all two-year and four-year public universities through a federal partnership with states, with the aim of eliminating the need for Americans to take on student debt in the future.

Sen. Bernie Sanders has proposed canceling all student debt regardless of income or wealth and providing funds to "guarantee tuition and debt-free public colleges, universities, HBCUs, Minority Serving Institutions and trade-schools."

"The short answer is we have a problem," said Smith. "The most important thing that lifts people in their station in life is education, and we have to make it in a way that is affordable and effective."

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