{"id":3095,"date":"2022-06-07T17:00:43","date_gmt":"2022-06-07T21:00:43","guid":{"rendered":"https:\/\/americancompass.beckandstone.com\/the-banality-of-student-loans\/"},"modified":"2022-11-08T00:01:43","modified_gmt":"2022-11-08T05:01:43","slug":"the-banality-of-student-loans","status":"publish","type":"post","link":"https:\/\/americancompass.org\/the-banality-of-student-loans\/","title":{"rendered":"The Banality of Student Loans"},"content":{"rendered":"\n
The mythology of \u201ccollege for all\u201d has produced a perverse financing system for higher education. Because policymakers regarded a college education as necessary<\/em> to opportunity, they made it a public obligation to facilitate any student attending any school, regardless of cost. Because they regarded a degree as sufficient<\/em> for success, they presumed that the return on investment would always be high. And having granted \u201ceducation\u201d a sacred status unlike other goods and services, they gave the associated debt a sacred status as well: not to be discharged in bankruptcy.<\/p>\n\n\n\n The results have been disastrous. College costs skyrocketed, fueled by government subsidies designed to grow right along with tuition. Young Americans and their families were encouraged to assume whatever debt necessary\u2014by not only policymakers promoting their loan programs, but also a culture that equated the practice with \u201cinvesting in your future\u201d and institutions that cashed the checks upfront and were never held accountable. In how many<\/a> movies<\/a> does the teenager, discovering his family\u2019s financial troubles, concede gloomily that he can abandon his first-choice school and attend the state university nearby, only for a determined parent to insist, no, we will find a way<\/em>?<\/p>\n\n\n\n In reality, meanwhile, students are more likely to drop out of college or else land in a job that does not require their degree<\/a> than they are to graduate into a career. Research suggests that<\/a>, for men, the selectivity of their school has no effect on future earnings; for women, more selective schools lead to more hours worked and lower marriage rates. The United States spends more than $25K per student\u2014second only to Luxembourg among developed economies and more than twice<\/a> the $10K\u2013$11K spent in countries like Denmark, France, and Germany. And student loan debt has become the nation\u2019s largest form of non-mortgage debt, sextupling from $260 billion in 2004 to $1.53 trillion at the start of 2020, by which point the U.S. Department of Education reported that about 20% of borrowers were in default<\/a>.<\/p>\n\n\n\n “Why is a household with relatively high student loan debt more deserving of government beneficence than a household with relatively high credit card debt, or with an auto loan it is struggling to pay off?”<\/p>\n\t\t\t<\/div>\n\t\t<\/div>\n <\/div>\n<\/section>\n\n\n\n Progressive politicians have responded with proposals<\/a> to \u201cforgive\u201d existing student debt, at the extreme<\/a> equating its very existence with \u201cviolence.\u201d But such proposals badly miss the mark in several respects. First, while a subset of borrowers are in crisis, the majority of debt<\/a> is held in the upper quintiles of the income distribution and by people with at least a master\u2019s degree. The two degrees accounting for the highest share<\/a> of outstanding debt are graduate degrees in law (JD) and business (MBA). Put another way, high levels of student loan forgiveness would go disproportionately to the Americans least in need of government assistance.<\/p>\n\n\n\n Second, while student loan debt has grown rapidly, it remains less than half<\/a> of non-mortgage debt and just over 10% of all household debt. The same sacred status that drove the rise in this one form of debt now drives the call for its forgiveness, with no clear justification. Why is a household with relatively high student loan debt more deserving of government beneficence than a household with relatively high credit card debt, or with an auto loan it is struggling to pay off?<\/p>\n\n\n\n Third, forgiving student loan debt without fixing the financing system that created the problem is not only an embarrassing dereliction of duty by policymakers, but also an invitation to even more students to take on even more reckless debts on the assumption that they too will someday be forgiven. In many respects the problem is similar to that of illegal immigration: Millions of people now find themselves in challenging circumstances, due to their own irresponsible behavior as well as a policy regime that actively encouraged it. Progressives clamor for amnesty, by executive fiat if not legislative action, while refusing to countenance the tough reforms necessary to prevent the problem from replicating itself thereafter.<\/p>\n\n\n\n Conservatives should propose an alternative that treats indebted students fairly and provides relief at a cost for those who truly need it, while eliminating the rotten system that gave rise to the problem and replacing it with one in which the institutions collecting the tuition bear the risk of failing to deliver the results they promise.<\/p>\n\n\n\n America\u2019s bankruptcy system is uniquely lenient. Unlike in most other countries, the typical American can walk into court, declare himself insolvent, hand over some remaining assets, default on his remaining debts, and return home to a house exempted from the proceedings. This choice is by no means an easy one\u2014his credit score plummets and borrowing becomes more difficult and costly; friends and neighbors are likely to notice, along with anyone who runs a background check in the future; feelings of failure and accompanying shame are common. Thus, while Americans file for bankruptcy far more frequently<\/a> than Europeans, the occurrence is sufficiently rare that consumer credit remains widely available and affordable. The cost of bankruptcy is low enough to encourage risk-taking and ensure that someone who truly needs a fresh start can get one, but high enough that most will do what they can to avoid it.<\/p>\n\n\n\n Student loans are the exception to this process. In 1976, Congress amended the U.S. bankruptcy code<\/a> to prohibit discharge of student loan debt during the first five years of repayment unless the filer could show \u201cundue hardship<\/a>,\u201d which requires additional proceedings and is a difficult standard to meet\u2014a debtor must show<\/a> at a minimum that he cannot maintain a \u201cminimal standard of living,\u201d he has made \u201cgood faith efforts\u201d to repay the loans, and his \u201cinability to pay is likely to persist.\u201d In 1990, Congress extended the no-discharge period to seven years. In 1998, it made all discharges of student debt subject to the \u201cundue hardship\u201d standard.<\/p>\n\n\n\n The stated rationale for this exception<\/a> is that, because the loans are offered without collateral, and because the valuable education that a student acquires cannot be repossessed by a lender, borrowers would face a strong temptation to default on debts that they could afford to pay. But there\u2019s little evidence to support the concern about excessive\u2014or fraudulent\u2014bankruptcy. In 1975\u201376, prior to congressional action, less than 1%<\/a> of federally guaranteed educational loans were discharged in bankruptcy. The U.S. Government Accountability Office found fewer than 5,000 annual bankruptcies discharging a total of less than $6 million in student debt<\/a>, as compared to more than 1.7 million graduating students<\/a> and $8 billion in outstanding loans<\/a>. The better explanation for the special treatment of student loans is the sacred status accorded to the spending they enable, in pursuit of presumably precious degrees that consistently produce a high return on investment. You can run up tens of thousands of dollars of credit card debt taking vacations and walk out of bankruptcy court owing nothing. But the debt you incurred for the life-changing wonders of time on a college campus, that must stay with you indefinitely.<\/p>\n\n\n\n “A much larger population outside the chosen group never had the opportunity to attend college but borrowed for some other purpose\u2014say, to buy a car to get to work\u2014and could sure use $20,000 themselves (call them the \u201cprecarity dads\u201d). Desacralize student loans, and then making this particular set of $20,000 gifts makes no sense.”<\/p>\n\t\t\t<\/div>\n\t\t<\/div>\n <\/div>\n<\/section>\n\n\n\n Allowing the discharge of student loans in bankruptcy would eliminate the sui generis <\/em>student debt \u201ccrisis,\u201d repositioning the loans as one of the many forms of debt held by large numbers of American households, sustainably serviced by most, and discharged for the small number who find the costs of bearing the debt higher than the cost of proceeding with bankruptcy. The reform would \u201ctake\u201d no property and abrogate no rights of creditors, whose claims are inherently subject to the always-changing bankruptcy code. With virtually all student debt already held by the federal government, even an unexpectedly high bankruptcy rate would pose no risk of contagion for financial institutions. And the federal government would forego far less repayment than under any forgiveness scheme, and probably only from those borrowers who will never repay regardless.<\/p>\n\n\n\n Leaving the debtor to make the difficult-by-design decision about bankruptcy is much preferable to political attempts at sorting borrowers into those deserving and undeserving of help. In a recent New York Times<\/em> column, David Brooks illustrates the pitfalls of the latter approach with his proposal to distinguish \u201cprecarity grads\u201d from \u201csecure grads.\u201d<\/a> Forgive up to $20,000, says Brooks, but only for \u201cprecarity grads\u2014perhaps to those from families making less than $75,000, perhaps to those who already received Pell grants.\u201d But many, probably most, in this preferred group don\u2019t need the help. Of those who do, many are in trouble only because they behaved irresponsibly. And a much larger population outside the chosen group never had the opportunity to attend college but borrowed for some other purpose\u2014say, to buy a car to get to work\u2014and could sure use $20,000 themselves (call them the \u201cprecarity dads\u201d). Desacralize student loans, and then making this particular set of $20,000 gifts makes no sense. Offer bankruptcy as an option to anyone in sufficiently dire straits, and the right group will receive the relief they need, at the price we have always believed someone unable to keep their financial promises should pay.<\/p>\n\n\n\n The goal for policymakers should be not merely to provide a fresh start for the most heavily burdened borrowers, but rather to put an end to the vicious cycle created by a financing system that relies heavily on public funds, which allows tuition to increase, which creates greater need for public funds. Public subsidies for higher education increased by 50% from 1993 to 2018<\/a>, after accounting for both inflation and enrollment increases. Yet as rising student loan balances suggest, this largesse didn\u2019t relieve pressure on students; it fueled even faster increases in tuition. While the industry likes to attribute rising prices to the cost of providing education, instruction accounts for only 30\u201340%<\/a> of expenditures; less than what is spent on \u201cacademic support, student services, and institutional support.\u201d Over the past decade, at public institutions, non-instructional costs rose three times as fast<\/a> as instructional ones in real terms.<\/p>\n\n\n\n To be sure, the public has a strong interest in helping young adults become productive citizens, and a college education will best accomplish that for some. But only half of young Americans attain even a community college degree<\/a>, and among bachelor\u2019s degree recipients 40% find jobs that do not require their degrees<\/a>. For most people, the path on which they would benefit from support should not pass through a leafy quad. Higher education subsidies should make college relatively more attractive for those who are most likely to benefit from it without luring in large numbers who are unlikely to complete a degree. Meanwhile, whatever level of support is offered to college-goers should be matched with equivalent support on noncollege pathways (see, for example, The Workforce Training Grant<\/em><\/a>).<\/p>\n\n\n\nStep 1: Discharging Student Loans in Bankruptcy <\/h2>\n\n\n\n
Step 2: Shifting to Institution-Led Financing<\/h2>\n\n\n\n