The reason this isn't done is because the obvious play is for a student with no assets to take the loans, get a degree, declare bankruptcy, and cruise out the next 7 years with a better paying job - it's not like they'll be ready to afford anything they'd need financing for anyway.
The problem of course is that the fix flips it the other way: student loan debt is functionally the safest possible debt because it can't be discharged through bankruptcy. Loan someone any amount of money, and provided you estimate their net productivity over their life accurately, you'll get your money back.
In isolation all of this sounds somewhat justifiable, but in the real world the results are disastrous: students are gate kept from higher income by getting a degree in a serious way, so they take on this undischargeable debt which people are happy to keep lending, so there's never any counter-pressure to colleges raising tuition rates, and government can say "everything is fine! Look at these enrollment numbers not changing!"
It drives me crazy that people don’t see the very simple reason why tuition has risen so much: student loan debt is not dischargable through bankruptcy. Even if the student is run over with a bus the debt can be passed on to family members.
The lenders that give out these loans therefore have essentially no risk and are highly incentivized to give out loans to any and every person that wants one, regardless of their creditworthiness or future earning potential. Universities have responded to this glut of money and demand by raising prices.
The solution is to allow student loans to be discharged through bankruptcy. Banks will respond by properly evaluating the risk of each loan instead of giving them out like candy. This will result in less students going to college, but that’s a fair price to pay to correct this massive distortion in the market.
The .gov backs student loans. And, they are non-dischargeable. So, it is zero risk for the lender to give loan to the 2.7 GPA moron getting a worthless basket weaving degree from the local private lib arts school for $100k. So, they give as many loans as possible, since they can't lose (taxpayer on the hook). Colleges are incentivized to drive up costs of tuition b/c tons of free money.
It's a classic moral hazard created by .gov guaranteeing the loans. Same thing we saw in the housing crisis.
Make student loans dischargeable in bankruptcy or take away the .gov guarantee and watch the market for student loans for worthless degrees dry up and tuition costs plummet.
You can just make college more expensive, that should punish 'defecting' all by itself.
My favourite policy suggestion for that: make it so that student loans can be discharged in a bankruptcy like any other loan. (Or more precisely, new student loans taken on after the new policy takes effect. No retro-active loan forgiveness.)
It's my favourite policy suggestion, because it's a common populist complaint that student loans stay with you forever. So my suggestion looks like it's giving in to that populist sentiment.
What is actually does: most students have no assets just after graduation, so bankruptcy is 'free' for them. Thus lenders can't count on getting the loans repaid, and thus won't loan as freely. Cutting off the spigot of student loan money will bring down the price of education.
It is one of many band-aids attempted to solve the root problem, which is that education is unaffordable in America for most people. The true solution in my opinion would be to allow people to discard their student loans with bankruptcy. Suddenly the government wouldn’t be offering $200k loans for humanities degrees, and universities would be forced to reduce prices or accept lower enrollments.
I'd like to propose a different option, one that would actually solve a lot of the current problems in the USA ... before posting a response, please read the 'why' section below.
- The government stops guaranteeing student debt to banks
- Students are allowed to declare bankruptcy and discharge their debt after N number of years, if they can prove that they're financially unable to pay & the market will not bear a salary high enough to service their debt for someone with their degree
- (optionally) The government stops subsidizing student loan interest
Why?
- If banks are liable to lose the capital in the loan, they will have incentive to make sure that the money is being spent wisely. This does mean that they'll no longer give out $100k for a hypothetical finger painting degree.
- It's a societal norm that debt can be discharged in bankruptcy if a person has no assets and no income, and student loans shouldn't be straight-up exception. We have to tighten this up a little bit to make sure people don't go to college, default, and then reap all the benefits ... but disallowing bankruptcy entirely seems extreme. Optionally, we could also consider revoking their degree if they default (rough equivalent of repossession of a physical good).
- College is extremely expensive right now because a flood of guaranteed, subsidize money has created fairly inelastic demand -- many students have little price sensitivity. This drives prices up. If loans are harder to get, smaller, and not subsidized, college prices come down.
The big problem with the American system right now is that we've written the educational institutions a blank check. If suddenly we put even a little economic pressure on the system, costs will come down.
Many of these changes couldn't be made retroactive -- loans were given out under a set of conditions agreed upon by all parties, and these determined the amount of the loans, so they shouldn't be changed. These changes could, however, improve things for future generations.
One last note -- as someone who spent 5 years paying off $100k in student loans, and who now makes enough money that I'd be excluded from the 'free' (AKA 'paid by everyone else') tuition plans for my own kids, I do admit that I'm not real excited about that idea. I would be pretty ticked off if I had to pay for my own tuition, my children's tuition, and also everyone else's kids tuition.
Allowing lenders (or providing greater incentive for them) to modulate rates on loans based on (a) the institution attended, (b) the major chosen, and (c) individual performance metrics, e.g. GPA, would be a solid step towards resolving education debt insolvency.
This could be achieved by switching government subsidies from loan guarantees to payment-share plans by which the government pays a portion of each payment but ceases to do so in case of default. These loans should be absolvable in bankruptcy - an immature decision made in one's adolescence shouldn't be a lifelong burden. Thus, the credit risk is retained by the lender while financial impact lessened on the student.
Unpopular as measures radically increasing costs on liberal arts majors may be, the present situation is a clear example of artificially locked markets producing inefficient outcomes.
The only solution to fixing the student loan crisis is the one no one wants to hear – end federally backed student loans, and make loans dischargeable in bankruptcy. The economic brunt of a bad loan needs to be felt by the issuing bank, not be distributed among taxpayers.
When lenders get more stringent about handing out hundreds of thousands of dollars to teenagers, colleges will automatically have to scale back fees in order to get people to apply. No more 5-star hotel rates for shoebox dorms and cafeteria food. No more multi-million dollar pay packages for administrators and sports coaches. Prioritize lending for degrees which have a higher earning potential and so a higher chance of paying back. Enforce a minimum GPA in order to keep getting funded.
Conversely, the worst thing you can do for the problem is forgive existing loans. What do you then do when universities jack up tuition even more and students run up a tab of another trillion dollars over the next decade and refuse to pay, knowing that the government will bail them out anyways?
I agree with this 100%. Student loan debt should not be treated specially. It should just be normal debt that you can discharge through bankruptcy.
At that point, the incentives of schools and the incentives of students would be aligned. Schools would not lend huge sums to students unless they had confidence that the education those students got was adequate to prepare them to repay. And the situation would fix itself. The fixed situation would probably have a lot fewer humanities students, and those students would have better job prospects since supply and demand would be aligned. Degrees would be shorter and less expensive, and overheads would be lower.
I don't think this is the cure for student loans, though.
The #1 reform student loans need is to be dischargeable through bankruptcy. There's a long list after that.
Credit records doesn't make the list for student loan reform to me. Credit records should be about choices, which student loans are, and which medical expenses are not.
The cliche about $200k debt for a liberal arts degree is perhaps an exaggeration, but the core of student loan reforms should be on realigning incentives to make sure the ROI is positive.
The logic isn't that student loans are a special thing that shouldn't have to be paid back. The logic is that under normal circumstances the lenders has an incentive to evaluate the probability that the borrower will actually pay the loan back. They might raise the interest rate on higher risk loans or just refuse to lend. But with federally guaranteed loans that can't possibly be discharged, the lender's new incentive is to saddle all possible borrowers with as much debt as they can, regardless of their ability to pay.
The idea is that the lenders would stop lending to students who are likely to fail or who are studying something they won't be able to get a job in. The new reality would be: either study something with serious job opportunities, or pay out of pocket.
Removing default risk from loans provided to young people for education is so perverse it almost goes beyond words. Re-introducing the ability to default would actually set a fair price on these loans -- interest rates would skyrocket, tuition prices would go down, or students would shift towards cheaper universities. If doing so results in massive outflows of tuition from universities for relatively worthless degress, and a large number of students deciding to forgo college altogether, that is what you call a "market correction" and would be extremely healthy.
The reason we are in this mess is because the loans are not priced properly because, other than the debtor dying or being unable to provide a steady income stream, or the government deciding to reverse policy, there is zero default risk. These loans are already yielding 8% in a market that has a risk free rate of about 3% over 30yr, and these loans cannot be defaulted on without a change in government policy! This should tell you just how fucked things are -- if students seeking degrees that will earn $20-30k/yr could default on these loans they would probably have a 20-30% interest rate (if not higher) or probably just wouldn't even be offered, since the default rate would be hilariously high, so the higher education market would be forced to correct.
Loans should not be a de-facto life-long indentured servitude to a lender. It's an abject moral failure of our society that this has been allowed to go on as long as it has. The day of reckoning will come eventually, maybe in a year, maybe in a decade, but when it does it's going to leave a gigantic crater in the interest rate markets.
This does not mean I am sympathizing with the people who have made poor financial decisions. Once corrected, these individuals should be free to declare bankruptcy and default on these debts, like any other, and pay the price for their actions in being unable to secure further lines of credit, potentially for the rest of their lives. This has real consequences: no credit cards, no car loans, no mortgage on a new house. This is the price we all agree to pay in the case of being unable to pay our debts: we cannot borrow money for many years if ever again. However, except for these poor souls, borrowers do not agree to being lifelong slaves if they make one poor financial decision or fall upon hardship that prevents repayment.
The loans are mispriced, and the lenders should have had higher interest rates on them knowing the risk of default was extremely high on a liberal arts major going to school for $50k/year. I am simply recognizing the fact that in this sector, the market has been distorted and is deeply corrupted by the removal of a fair market for student debt. These banks deserve to be wiped out on these loans.
People claim this is a huge problem, and at this point I suppose it is, but it was not always so. The government should get out of the business of giving and guaranteeing education loans and this debt should be disposable in bankruptcy. The problem would go away very quickly. Lenders would have to take a close look at the borrower, their academic record, their major, career prospects, etc. before making these loans. Which is how it should be in the first place. Of course there will those that whine about access to higher education, but I think that argument has already failed spectacularly. We are witnessing first hand that higher education is not for everybody and for many degree programs has zero bearing on future financial success.
$1 trillion in student loan debt you say? Simple solution, let the Fed print up and loan out 0% interest loans that roll over indefinitely and hand them out to students, just like the $16 trillion they handed out to the banks.
Oh wait, I forgot only bankers get free money in America.
Serious solution: repeal the law that says student loan debt cannot be discharged in bankruptcy. Then lenders will need to do a serious assessment of whether the money they are loaning out can be paid back based on assessing the student.
I will also like to mention that somehow other nations seem to not require massive tuition fees. A basic college education should be MUCH lower cost.
That would be the end of poor people going to college in this country, at least under the current legislative regime. The only reason anyone loans money to poor people to go to college right now is because they know the recipients can't get out from under the loans. A no-collateral loan to someone with few assets or prospects just wouldn't happen if that provision in the law didn't exist. Or the interest rate would be enormous. But if the interest rate were high then defaults would be high. So you'd probably have some sort of death spiral. No, I doubt such lending would happen any more.
Now, the legislative regime could change. But it would have to change quite a bit to get significant increases in funding for college. Or maybe it's better if poor people just don't go to college? That's questionable at best.
I think this problem is a lot harder than people on this thread are making it out to be. Making student loan debt bankruptcy proof is within the Overton window in this country. I guess not making it bankruptcy-proof with no other changes is also within that window. Free or reduced price college tuition for the vast swathes of people who need it to attend is just outside, so it's definitely a foreseeable outcome, but if we don't get there in the next two decades that wouldn't surprise me either.
Since there is pretty much no social safety net, people are probably going to find some sort of work even if they have a lot of student loan debt. And, the debt servicer can garnish those wages. You are essentially selling yourself into slavery if you take a student loan! (And the reasoning is so weird to me; I went to a state school and tuition was $750/semester. Why are people paying more unless they are extremely gifted and they want to go into a highly regulated field like civil engineering or medicine?)
Student loans not being dischargeable through bankruptcy creates a moral hazard, much like bailing out banks. Banks will lend an infinite amount of money for student loans, because there is no risk to them. Creating free money always devalues it; if you have to work for your money, an education is priced $X because that's the maximum people will pay. If everyone gets unearned money to pay for education, it becomes worth $X + $Y. This is just the SaaS model for people. (Consider AWS; "oh you want to make money selling a SaaS service? we'll take 10% of your revenue for servers." Student loans are the same thing, "oh, you want to go into a high-earning field? we'll take 30% of your income for the next 10 years.")
Compare this to things where banks could lose money, like mortgages. If you bid $1,000,000 on a property that's worth $200,000, the bank will simply require a down payment of $840,000. They have no interest in your starry-eyed games. If you walk away, they can close out your loan by selling the property at the appraised value, and they're happy. Banks have the right amount of paranoia about lending for this kind of purchase; their goal is to never lose money. Student loans should be no different; current grades and expected job prospects should play heavily into the decision as to whether or not to lend money. This will reduce the cost of education because selling a $600,000 art history degree to straight-C students won't be viable in the market anymore. (Universities will fight hard against this, because the degrees are cheap and everyone pretends they have some value. If people realize degrees don't have much value, the cash cow dries up. But we have to kind of look at the effect on society as a whole and realize that work experience is actually what we value. After the first 4 years of your career, nobody cares about your GPA or where you went to school anymore. And incidentally, 4 years is exactly how long college takes!)
Is it fixable if they simply make the debt dischargeable and impose a tuition ceiling or is that one act sufficient to rein-in the prices without affecting access to what all students basically are: low income future worker citizens just starting out
Even simpler: Don't have the government involved in student loans at all, and let the market price loans for different degrees for different students freely. Those institutions that can convince lenders that graduates will be in a position to pay back the loans quickly will be able to offer lower rates to students, and thus attract more and better students.
Those out to study degrees that don't offer great employment opportunities will be offered more expensive loans which will curb demand for such degrees which will depress the cost of the degrees. It will also make sure that fewer people will go to a party college and study an easy degree (or, at least, that those that do aren't subsidised by tax-payer underwritten credit).
Extra bonus: All those companies that clamour for STEM grads have a very simple avenue for putting their money where their mouths are: Simply go out and underwrite some cheap loans. (And no, indentured servitude is still illegal - companies underwriting student debt shouldn't be allowed to change the terms of the loan if the student comes to work for them).
The government-enforced student loan system is the problem. Universities know they can charge whatever they want for tuition, they will get their money up-front, and the students will be on the hook for it for life (and it can't be declared in a Bankruptcy).
We need to revamp the system so universities can't charge us these ridiculous rates.
The problem of course is that the fix flips it the other way: student loan debt is functionally the safest possible debt because it can't be discharged through bankruptcy. Loan someone any amount of money, and provided you estimate their net productivity over their life accurately, you'll get your money back.
In isolation all of this sounds somewhat justifiable, but in the real world the results are disastrous: students are gate kept from higher income by getting a degree in a serious way, so they take on this undischargeable debt which people are happy to keep lending, so there's never any counter-pressure to colleges raising tuition rates, and government can say "everything is fine! Look at these enrollment numbers not changing!"
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