Here's a riddle that many Americans are familiar with: how
are a house mortgage, credit card debt, and a car loan different from student
loans? For the latter, the federal government has gone the extra mile to
protect lenders by making them non-dischargeable in bankruptcy. This means
that student loans, unlike almost every other kind of loan available, cannot be
escaped through bankruptcy. With student loan debt approaching nearly $1 trillion nationally, a growing portion of Americans are facing a growing
burden of inescapable indebtedness. This burden of debt is especially
borne by the young, the group which has perhaps been hit the hardest by the
economic slowdown.
It wasn't always this way. According to the non-partisan
Congressional Research Service, until 1976, all student loans could be
discharged in bankruptcy. Up until 1998, student loans could be
discharged after a waiting period (of initially five and later seven years
after repayment was scheduled to begin). In 1998, Congress made federal
student loans nondischargeable in bankruptcy, and, in 2005, it similarly
extended nodischargeability to private student loans. (Extreme hardship
can still result in the discharge of some student loans, but this condition is
rather difficult to establish.) Since 2000, student loan debt has
exploded, and private student loans have grown at an accelerated rate. Somehow,
people still went to college and were able to get loans prior to 2005.
Clearly, certain lenders found it in their own interest to provide loans even
when there was a chance of bankruptcy.
Some have tried to frame the issue of nondischargeability of student loans in
terms of guaranteeing access to education. According to these arguments,
the fact that such loans are not dischargeable allows students greater access
to higher education: since lenders know that students cannot escape their debt,
they will be encouraged to lend money out more easily (increasing the amount of
money lent out and lowering perhaps the interest rates on these loans in some
cases).
Such arguments would seem to ignore some of the hard lessons of the past
decade, when gratuitous credit for both private individuals and corporations
helped lead to an unsustainable bubble in real estate and securities.
Moreover, at least people can declare bankruptcy and escape their mortgages
(and certain favored companies can get government subsidies so that they can
avoid bankruptcy). This is not the case for student loans.
Furthermore, the argument that educational access is improved by creating an
eternal tie between borrower and debt could be applied to other areas as
well. By such reasoning, perhaps the nondischargeability of car loans
would help Americans get better cars or the nondischargeability of credit card
debts could improve the material comforts of Americans by giving them access to
more credit.
There's another approach to bankruptcy, however. Borrowers' potential for
bankruptcy represents a kind of risk for lenders---a risk that encourages
lenders to be efficient about whom they lend money to. And this efficiency
may lead to results in the interests of both borrowers and lenders. Due to
this risk, the lender needs to determine how likely the borrower will be to pay
him back, and the lender's evaluation of this risk can lead to him not lending
too much money to the borrower, thereby preventing the borrower from getting
over his head in debt.
Consider the case of student loans. If these loans were dischargeable in
bankruptcy, lenders (especially private ones) would have to be more prudent
about how much money they lend out to particular individuals. Currently,
lenders have relatively little compunction about lending out $75,000 to a
student as they know that this student's odds of escaping this debt are
relatively small: it might not be paid back on time, but the lender will
maintain a perpetual claim on the borrower. If there were a greater risk
of bankruptcy, however, lenders might be more targeted in the amounts they
lend.
Ironically, this targeting might make education more---not
less---affordable. There is a limit to what students and their families
can currently pay, and, by limiting the ability of some to borrow against their
future, regulators might suggest to colleges and universities that the spigot
of ever-more money might be turned off. This economic pressure might
encourage universities to be more efficient with their own spending, thereby
slowing the rate of tuition growth. Increased lending standards might
encourage students to be more prudent with their own money. Higher
standards might raise hard questions. A student might ask herself whether
she should go to a low-ranked private university for four years or instead
spend her first two years at a much more affordable community college before
transferring to another university. The end result for the student's
employment prospects might be the same, but the debt accumulated along the way might be
very different under those two scenarios.
Moreover,
there is a matter of fundamental principle here. Bankruptcy has
a proud tradition in free market economies. The ability to start anew
is
both good for the human spirit and economically beneficial: this ability
encourages taking risks and gives a sense of hope in the face of
adversity.
It's true that a college degree cannot be repossessed like a car with
delinquent payments can be, but there has been little evidence that,
prior to
2005, there was massive abuse on the part of student loan borrowers.
Conservative politics is not just about the crude application of
abstract principles; it also involves attention to local realities. Yet
it seems that there was considerable access to credit for student loans
prior to their being made non-dischargeable in bankruptcy.
Republicans might have a particular interest in restoring market norms to
student loans: by normalizing student loans, Republicans could at once stand
for free market principles and demonstrate their empathy for younger
voters. If conservatives are serious about spreading free market ideas
(rather than merely using the rhetoric of the market to hammer the opponents of the
moment), a right-led movement to make student loans dischargeable in bankruptcy
could be one more point of evidence for America's youth that free market ideas
can work for a wide variety of people.
News stories abound with examples of graduates who have borrowed colossal
amounts of money and who have little potential of paying it back, at least in
the short- and medium-term. These students are shackled to this
debt. It's true that these graduates chose to borrow this money, but it
is also true that the federal government has chosen to give protections to
lending companies for a certain kind of loan. It is not clear whether
these special protections for certain lenders are in the best interests of the
nation and its citizens, nor is it clear why the loans taken on by some of America's
youngest should be the hardest to discharge. Making student loans
dischargeable in bankruptcy is not loan forgiveness: in filing for bankruptcy,
an individual would pay a considerable price for the dissolution of this
debt. But the ability to pay this price is one we offer to borrowers of
countless other loans.
The mechanics of how to put in
place such dischargeability are
complicated. Would old student loans be made retroactively
dischargeable
in bankruptcy? Would there be a waiting period before someone could
discharge his or her loans? Would both federal and private loans be
made dischargeable? But these complications should not deter
conservatives from taking seriously the free market case for student
loan
dischargeability.
In 2008, Congress decided it was in the national interest to rescue
multinational banks from the prospect of bankruptcy, passing TARP. If
corporate bailouts are good enough for billionaires, perhaps opening up the
door to student loan bankruptcy (far from a bailout) might be permitted average
Americans.
Wednesday, April 4, 2012
Should the Right Support Making Student Loans Dischargeable in Bankruptcy?
Labels:
classical conservatism,
debt,
student loans