01 November 2011

Student Loans

NY Post | Glenn Reynolds | Government inflated the college loan bubble -- but Obama isn’t fixing it

I think we should return to the days when student loans were dischargeable in bankruptcy, starting five years after graduation. This will allow graduates who are unable to pay to get out from under what is otherwise a potential lifetime of debt-slavery. If you buy a house to flip, and wind up losing your shirt, we let you go bankrupt, take a credit-rating hit, and scrub the debt away. Why should graduates be forbidden from doing the same?
Why not? Because — as has been pointed out often but apparently not often enough — you can repossess a house. The lender can't repo your knowledge.

It actually isn't a terrible idea to make student loans dischargeable. The analogy to mortgages is just unconvincing and incongruent. If you do that though you need to let lenders charge accordingly. (Which to his credit Reynolds talks about.)
The five-year delay means that you can’t use immediate post-graduation poverty as an excuse (as some medical students used to do), but still provides an out.
I don't think five years is nearly enough. I know a lot of people who have been hanging out for five years after college, living off their parents, doing a minimum amount of work. Many don't show much sign of getting serious and productive. If you make debt dischargeable five years after graduation you incentive doing nothing for five years.

It will be okay, encouraged even, to graduate, spend five years doing nothing, maybe taking low paid work, turning down any job that isn't perfect for you, then get rid of your debts, live another few years with continued bad credit, and then move on. We need people to get productive sooner, not give them a reason to wait longer before earning income creating value for others.

But the real incentive-alignment part is this: Put the institutions who issued the degrees on the hook for the money they received. [...] Sticking them with even a small fraction -- say, 10% or 15% -- would be enough to inspire a much greater degree of concern for how much debt students take on while in school, and for how likely they are to find gainful employment after graduation.
That's an interesting idea.

As a first step towards reforming student loans I would allow — encourage! — lenders to consider students' academic records and courses of study.

On a related note, I continue to think the market is ripe for some colleges to market themselves strongly as "high-value" or "high-efficiency" schools. Instead of bragging about state-of-the-art gyms and how many congressmen are alumni, brag about students' mid-career salaries and how little debt load they graduate with. You'll hook some very bright, motivated student that way. Of course it doesn't stroke the egos of the administration and Board of Regents, which is what
a university uses to in place of profits to compensate the residual claimants.

PS As Radley Balko points out when commenting on this article, isn't forgiving student loans a big slap in the face to people who have diligently paid down their debt, or avoided it in the first place? I have a lot of friends who did a lot of unpleasant shit in exchange for tuition credits. Forgiving student loans ex post makes all of that worthless.

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