Arnold Kling  

Student Loans

Bill Niskanen, RIP... Learning Economics...

Mike Konczal writes,

Because of legal choices we've made in how to set up this relationship, it stays forever, is virtually impossible to discharge under hardship, churns fees when it goes bad, and creditors can get to anything, including Social Security, to get it repaid. Meanwhile, we have a Great Depression-like event that is throwing college graduates into a labor market that is far too weak.

This seems to be the issue du jour. If we were searching for cosmic justice, who should suffer?

I guess a lot of people are saying that the students who took out loans should not suffer. For now, let's assume that this is correct.

Should the lenders suffer? It's popular to hate banks, but it's hard to see what they did wrong here. It's also hard to see how to stick them with the tab, at least for loans that were guaranteed by the government. But punishing the government means punishing taxpayers.

If you transfer debt from students to taxpayers, it is not clear that you achieve cosmic justice. It is not even clear that you change the generational distribution of debt. Konczal is upset that even Social Security checks can be garnished to pay student loans. Is that worse than having Social Security benefits cut in order to pay off the debt that was incurred by the government when it canceled your student loan?

On the cosmic justice front, there might be something to be said for a "clawback" of past earnings of professors and administrators at colleges. But I don't see anyone clamoring for that.

Of course, cosmic justice is always served by taxing people with high incomes. Make them pay off everyone else's student loans, bad mortgages, free health care for all, etc. After all, it is the fault of high-income people that students borrowed all that money. Isn't it?

I don't think that young people who did what was normal at the time and are now suffering for it are receiving cosmic justice. But I don't think that cosmic justice is going to happen in this world.

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COMMENTS (20 to date)

Sarcasm aside, sure, given current levels of US wealth and income inequality why not resolve all issues of cosmic justice by having very wealthy people pay for anything? Income has declining marginal utility.

Tom writes:

I thought you said sarcasm aside.

Vladimir writes:

Building off your premise that less money should go to professors and administrators, the best way to achieve that cosmic justice in the future is to ratchet down the flow of student loans. Forcing bankers and taxpayers to pay now, will discourage over-provision of student loans by industry and government in the future. In turn, universities will have to compete more on tuition.

Theoretically, forcing students to pay off their loans should discourage future students from taking so many loans. But that's not practical. Colleges will be able to charge higher tuition as long as sufficiently large students loans are available.

Joe writes:

Banks made the can lend and make money, or you can lend and lose money. It seems it would be in the interest of the banks to renegotiate these deals, and give the students better terms?

Imagine if all students with loans used social networking to form a group that decided it was in all of their interest to act as one and demand the banks rework the loans?

Just like Trump said: If you owe the bank 1 Million you are in trouble, but if you owe the bank 1 Billion the bank is in trouble...

Noah Yetter writes:

And yet, interpersonal utility comparisons remain fundamentally impossible. We cannot say, now or ever, that you enjoy a marginal $1 more than I do.

Clay writes:

One other issue, is people don't just use student loans for bare education, many people fund their lifestyles throughout their 20's with student loans. I know people who got need based scholarships that completely paid for all tuition and textbook expenses, but used student loans as extra money for non-educational related lifestyle expenses. It's ridiculous that they are now getting various loan forgiveness offers with these righteous justifications, yet I personally know them and remember when they really used their student loans to buy HDTVs, expensive clothes, rent a nicer apartment without needing a room mate, and other luxury purchases.

Becky Hargrove writes:

Forgive me Lord but I can't resist...
This is why so many in the universe refer to Earth as the 'poor little starter world', to which God and Jesus find that they need to send many angels to for the micromanaging that it so often requires.

David writes:

I like the idea of a clawback from the edu-complex. They are the ultimate and perhaps only beneficiaries of loans that produce 1000's of theatre arts majors from State U. At least the Repo Man winds up with your car. The alternative seems to be student loans only to engineering and physics majors, but I have a hunch the Edu-crats would not embrace that. Change your major from physics to poly sci? Lose your loan!

Thomas Sewell writes:

Cosmic Justice?

How about we start by taking the government bureaucrats specifically responsible for overseeing the student loan program and cut their pay and benefits to help cover the defaults?

Then force the head of their agency into bankruptcy and move on to fines for the members of Congress who voted to approve the loan guarantees?

Wait, I must've forgot about the rule that the technocrats can never be blamed when their policy designs fail... after all, it was for the (adult) children...

Mercer writes:

"used student loans as extra money for non-educational related lifestyle expenses. It's ridiculous that they are now getting various loan forgiveness offers"

If someone used credit cards for lifestyle expenses they can discharge the debt in bankruptcy. Why should student loan debt being harder to discharge?

JKB writes:

Why not let the loans be discharged in bankruptcy if they demonstrate 10 years of credible effort to pay the loan, i.e., no running off for a year or two to find yourself when you should be working to pay off your loan.

Just one caveat, you discharge the loan, you surrender the credential (diploma) and transcripts. They can keep and use the education but not the credentials. I would make a special proviso that if they pay off the loan in the future, the credentials are restored. (Some control of fees and interest accrual after discharge would have to be sorted out).

You took on too much debt for a degree, you can get out from under the loan by losing the credential.

blsdaniel writes:

How about we just let college debt be discharged via a bankruptcy like any other debt?

I owe lots, and I'm paying it off just fine. But if enough bad circumstances and / or bad decisions on the borrower's part cause them to go into bankruptcy and thereby discharge their other debts, why shouldn't educational debts also be discharged?

In that case, it IS the tax payers who are on the hook, because their agents (the government) decided to guarantee the debt. That's what happens in the rest of the world when someone defaults on the debt that someone else guaranteed: the guarantor pays.

G.L.Piggy writes:

Take away the guarantees and take away the provision against discharging the debt throuht bankruptcy. Do that for existing loans and do that for every loan going forward.

Let the chips fall where they may.

Emily Morgan writes:

How is making it easier to pay the loans back bailing anyone out? He shaved 5% off the payment and 5 years off the term. Were you against the policy as it was before, or is this just another knee jerk reaction to anything President Obama does? Are you just against anything that will help people survive in this economy? These young people did not anticipate that there would be no jobs for them after graduation and the ones that are for much smaller salaries which force to look for additional cash advance loans. Are you aware of some of the ...See Morepreditory pracitices by some of the student loan lenders? Probaby not. If you have manged to make it with no help from anyone, good for you. I have never taken a dime from the federal government but I sure have a different attitude from you. I run my business but I am sure grateful for my customers, without whom I could not exist. We do not succeed or fail in this world on completely on your own.

Shayne Cook writes:

To Emily Morgan:

First, I agree with your last statement completely.

But I think what Arnold is getting at is, for Recent College Graduates (RCG's), the collective or individual college debt is rather paltry relative to their share of the National Debt.

When they DO get a job in the U.S. economy their share of the National Debt is currently over $132,500 and rising very, very rapidly. Fulfilling Obama's promise will merely increase that National Debt marginally more rapidly.

The RCG's mandatory payments for that debt will be vastly in excess of 10% OR 15% of the RCG's income, and will NOT simply go away after 20 years. Quite frankly, for the economically rational RCG, the optimal choice is to flee the (U.S.) jurisdiction.

By the way, Barack Obama is NOT the sole architect of this situation - there are currently 535 co-conspirators.

Troy Camplin writes:

Bottom line: low-interest student loans misinformed people as to the real costs of college. Is someone to be held responsible for the decisions they made when they were doing so under misinformation? Or should those engaging in the misinformation be held responsible. Of course Kling is absolutely right about everything he says, as I said earlier myself:

Personally, the economy would be in much better shape if instead of bailouts, etc. the government had instead spent that money on helping people with their student loans and underwater mortgages (two things people made decisions on based on bad information provided them by our government).

I suppose one could say, since the government is responsible for this situation, and the people who voted for the people who created the situation are responsible for electing those people, the voters -- and, therefore, the taxpayers -- are responsible, and ought to pay. But would that help or harm the economy? Given the fact that many people are not spending money because they do not have money because they have to pay so much loan debt, I wonder if it could harm it much more than everything our government has already done?

At the very least, the rules need to change. You have to be able to get out from under student loan debt through bankruptcy at least.

Robert writes:

The currently unfolding deflationary depression ought to correct college and university tuition, along with a whole lot else. The near-total wipeout of credit and debt it will bring will bring prices of everything, including tuition, back to prices that are not artificially inflated by credit. But the fact that bank deposits are among the debts/credits that will be wiped out, and unemployment over 25% by the time it's over is really going to suck...

govt_mule writes:

The banks charge students 6-8% interest on funds they borrow at 0 - 2% and assume absolutely no risk. If the govt (us) is going to guarantee the loans we should cut out corporate welfare to the banks and loan directly to students.

Clay writes:

"If someone used credit cards for lifestyle expenses they can discharge the debt in bankruptcy. Why should student loan debt being harder to discharge?"

Because student loans are entitled to artificially loose credit terms, high credit limits, and low interest rates.

With private loan bankruptcy discharge, people generally have to experience quite a bit of pain to use bankruptcy. And secondly, the credit limits limit the financial damage most people are able to cause. If you remove the pain deterrent and remove the credit limit damage cap, the system is wide open to abuse.

With dischargeable student loans, people could use planned bankruptcies to borrow massive (~$200K) loans, purposefully blow through it, and then discharge through bankruptcy with minimal discomfort.

Dan Weber writes:
With dischargeable student loans, people could use planned bankruptcies to borrow massive (~$200K) loans, purposefully blow through it, and then discharge through bankruptcy with minimal discomfort.

Lenders would not be willing to lend so much money to someone with no assets. And without easy credit, there would be some price pressure on college costs.

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