The Wrong Solution to Crushing Student Loan Debt


Thursday August 6th, 2015   •   Posted by Craig Eyermann at 9:34pm PST   •  

Graduation_Cap_and_Diploma The story we’re about to share is completely true. It was just published by Bloomberg and describes how the Obama administration is working to relieve the crushing burden of student loan debt by making taxpayers pick up the tab for the wasted education of a 29-year old Chicago woman who graduated with a doctorate degree.

Laura Strong, a 29-year-old in suburban Chicago, owes $245,000 on student loans for the psychology Ph.D. she finished in 2013. This year, she says she hopes to earn $35,000 working part-time jobs as a therapist and yoga teacher—not enough to manage a loan payment of about $2,000 a month. But Strong isn’t paying anything close to that. She’s one of at least 3.8 million Americans who’ve qualified for federal programs that tie payments to income and eventually forgive debt for some struggling borrowers, leaving taxpayers to pick up the tab.

Clearly there’s a lot that has gone wrong here. For example, Laura Strong could have pursued a degree program that would have led her to a genuinely productive career, one that if people valued her line of study enough to justify her academic program’s enormous tuition bills, would have led to a well-paying job in her field of study. But that was something that was not to be found waiting for her at the end of her studies, and as a result, she has instead found herself with a fool’s gold-plated trophy diploma, which she might as well have been awarded for participation rather than meaningful academic achievement.

But with $245,000 of student loan debt to show for her poor choices, we have to recognize that the bad decisions that led to her personal taxpayer-funded bailout weren’t made in a vacuum. She got the federal government to loan her the money to rack up that tuition bill. And in fact, she may have been exploited by the government-academic industrial complex that was counting on her being bailed out even as they jacked up her tuition bills year after year.

Income-based repayment was introduced under President Clinton, but the programs weren’t heavily promoted until late 2013, when the Obama administration began sending e-mails to borrowers, including Strong, telling them, “Your initial payment could be as low as $0 a month.” The number of people using these plans has quadrupled since 2012. About half of borrowers taking out the Department of Education’s Grad Plus loans, which finance advanced-degree studies, are in income-driven plans. Most borrowers in the programs have payments capped at 15 percent of income, with allowances for housing and other expenses. In December the Obama administration is expected to expand the number of borrowers eligible for a payment cap of 10 percent. In a July 27 speech at the University of Maryland’s Baltimore campus, Secretary of Education Arne Duncan said the plans protect people going into socially valuable but low-paying lines of work from crushing debt. “That’s good for them. That’s good for our economy. It’s good for our society,” he said.

Critics say the plans are a hidden subsidy to well-off students and colleges, which can justify tuition increases by reassuring students that they may not have to repay their debt. In a seminar at Georgetown Law, Charles Pruett, assistant dean for financial aid, was captured on video telling alumni they could “ignore” debt balances if they spent 10 years in government or nonprofit jobs, which would qualify them for early loan forgiveness. (The video was first reported in 2013 by the New America Foundation, a Washington think tank.) Pruett says Georgetown promotes the programs to encourage graduates to take public-service jobs. “It’s an earned benefit, not a giveaway,” he says.

Speaking of that video, here it is:

It seems like an awful lot of nonsense to go through to justify being able to work in a “socially valuable but low-paying line of work,” which is really just a polite way of saying a “job that really doesn’t require all that much education.” Kind of like a minimum wage-paying cashier’s job at a fast food restaurant and many of the kinds of jobs that can be easily taken over by today’s automation technology.

And all to benefit the government-academic industrial complex, at the expense of those they exploit.

There is a better way to handle that situation, one that puts the cost of bad decisions directly on those who contribute to both making and enabling them. Allow all student loans, whether issued by private lenders or the federal government, to be fully discharged in bankruptcy.

Here, people like Laura Strong who have made poor choices in pursuing their academic path would bear the direct penalty of going through bankruptcy proceedings. While that would limit their ability to take out other kinds of loans, it would actually have the benefit of lasting for fewer years on their record than the government’s preferred “income-based repayment” alternative, which is really just the same as an income tax—one that’s additionally imposed on people who have proven to only be capable of earning low incomes.

At the same time, the federal government would have a strong incentive to be a lot less wasteful in how it doles out federal direct student loan dollars, as it would no longer be able to profit when many of the students whose educations they fund turn out to not be capable of paying them back because people don’t value them very much or because the economy won’t support them.

And with a federal government that can no longer subsidize the growth of tuition at U.S. universities to the extent they have, that tuition growth in the future would be much more restrained, which would actually help make pursuing college and advanced degrees more affordable for those who can genuinely benefit from gaining that level of education.

It seems odd to suggest that bankruptcy is a better solution than alternatives that avoid that outcome, but where student loan debt is concerned, the benefits would far outweigh the costs for everyone but the government-academic industrial complex.

And as long as U.S. taxpayers are going to be made to bear the cost, they might as well get something positive to show for it by sticking it to the people who are gaming the system for their own benefit.




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