Should the Right Support Making Student Loans Dischargeable in Bankruptcy?

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.

Reforming Local Control Away

Last week, the Louisiana House passed HB974, which would reform teacher tenure in that state, with a bipartisan majority.  This measure radically weakens teacher tenure: in order to receive tenure, a teacher must be rated "highly effective" for five out of six years.  If this teacher is ever rated as "ineffective," he or she immediately loses tenure.  At least 50% of a teacher's effectiveness evaluation will depend upon value-added test score data.  Republicans were not united in the passage of HB974 in the Louisiana House.  Indeed, without the support of Democrats, this measure would not have passed.  The Louisiana State Senate is due to consider this measure shortly: the Education Committee seems currently scheduled to review the legislation on Thursday.

Some "conservative" groups are celebrating the passage of this bill.  This celebration might be more than a little ironic, however, because HB974 seems a text taken straight from the annals of radical progressivism (or perhaps progressive radicalism) rather than traditional conservatism.  Rather than running schools as community enterprises, HB974 pushes in the direction of a quasi-corporate power structure---with centralized power and a preponderance of statistical diktats.

There's much more to this measure than merely redefining the terms of tenure.  HB974 weakens the power of a town or city to govern its schools.  Under old law, local school boards were the ultimate decision-makers in hiring: the recommendations of school administrators had to be approved by them (and the boards could reject the recommendations of superintendents and principals).  Not anymore.  Under HB974, boards delegate their authority to superintendents.  Rather than the superintendent being an academic advisor and leader for a public school, he or she acquires CEO-like powers.  Superintendents and principals become the ones with the authority to hire and fire under this new measure.

Moreover, the state further ties school board hands.  School boards must establish contracts with performance targets for superintendents.  If these targets are not met, the superintendent's contract must not be renewed.  For districts including at least 75% of Louisiana schools (ones that do not receive an "A" or "B" rating from the state), HB974 specifies in further detail the kinds of targets a superintendent's contract must include.  Whenever a school board decides not to renew a superintendent's contract (for the moment, school boards still have that power), it must file a report with the state explaining its actions.  If budget cuts come and staff must be reduced, HB974 offers a formula for how staff must be reduced, with the least "effective" faculty member in an academic area being let go first.  So much for local discretion.

Moreover, tenure under HB974 ain't quite what it used to be.  Tenure protections are radically weakened by HB974, in ways that might to make traditional conservatives nervous (and not only traditional conservatives, either).  Consider the legislative language describing how a tenured teacher may be dismissed under HB974 (the numbers are line numbers in the bill text):

A teacher with tenure shall not be removed from office
4 except upon written and signed charges of poor performance,willful neglect of duty,
5 or incompetency, dishonesty, or immorality, or of being a member of or contributing
6 to any group, organization, movement, or corporation that is by law or injunction
7 prohibited from operating in the state of Louisiana, and then only furnished with a copy of such written charges and given the opportunity to
9 respond. The teacher shall have seven days to respond, and such response shall be
10 included in the teacher's personnel file. At the end of this seven-day time period, the
11 superintendent may terminate the teacher's employment. A teacher shall not be
12 terminated for an "ineffective" performance rating until completion of the grievance
13 procedure established pursuant to R.S. 17:3883(A)(5) if a grievance was timely filed.
14 Within seven days after dismissal, a teacher may request and upon request shall be
15 granted a hearing by a panel
16 composed of a designee of the superintendent, a designee of the principal or the
17 administrative head of the state special school in which the teacher was employed,
18 and a designee of the teacher. In no case shall the superintendent, the principal or
19 state special school administrative head, or teacher designate an immediate family
20 member or any full-time employee of the school system by which the teacher was
21 employed who is under the supervision of the person making the designation.

The key detail about this language is that a tenured teacher need not be found guilty of these charges of poor performance, willful neglect of duty, incompetence, dishonesty, or immorality in order to be dismissed (as current Louisiana law requires).  Instead, HB974 only requires that the teacher be given the charges in writing and be given the opportunity to address these charges.  The charges could be completely mendacious, and the tenured teacher could still lose his or her job at the superintendent's whim.

Current Louisiana law gives school boards the power to review appeals for tenure dismissal.  As it does with many other traditional local powers, HB974 strips the school board of this authority and instead gives the superintendent the ability to review the teacher's case.

If the teacher wishes to appeal the superintendent's decision, he or she enters a kind of kangaroo court, where three people review this ruling: a designee of the superintendent, a designee of the principal, and a designee of the teacher.  Under HB974, the principal serves under the superintendent, so the panel called to review the superintendent's decision would be stacked 2-1 with people either appointed by the superintendent or someone under the superintendent's control (the principal).  So much for due process.  (Conceivably, the teacher could then try to appeal to a court to reverse this decision, but this appeal could place considerable costs upon a teacher.)

The superintendent under HB974 basically has the ability to hire and fire at will---regardless of tenure.  Checks and balances are effectively removed.  It's hard to see how this radical power is in accord with conventional Republican and conservative principles of diffusion of public power and an emphasis on local control.  (And, yes, public schools are public institutions, and these schools are in part funded by local tax dollars.)

Moreover, in enshrining value-added testing performance for teacher evaluations, HB974 idolizes bureaucratic instruments in a way that seems utterly divorced from conservatism.  As New York City's recent value-added testing data dump shows, the results of value-added teacher evaluations can be totally arbitrary as well as disconnected from reality.  Conservatives have made a lot of conceptual and political headway since the 1960s by pointing to the absurd results that centralized bureaucracies could lead to; it seems a rather sad turn, then, for purported conservatives to be embracing such bureaucracies.

Measures that deify value-added testing would seem to give power to the ultimate unelected bureaucrats: those who design these tests and create the complex (and quite possibly flawed) equations used to determine value-added knowledge.  HB974 would seem to accelerate the tendency in Louisiana to wrest control of schools from the local community and transfer it to an appointed (in the case of superintendents) and unelected few.

If someone were interested in centralizing schooling in Louisiana, HB974 combined with HB976 (which expands the power of charter schools and certain central state agencies) would be a good way to do it.  It's no surprise that some Tea Party groups in Louisiana are beginning to mobilize against this measure.  HB974's tendencies would seem to go against the small, localized government that many Tea Partiers claim to support. In the days ahead, perhaps Louisiana will witness the unlikeliest of odd couples: teachers unions and Tea Partiers coming together to defend the tradition of local governance.  Some solid conservatives in the Louisiana House opposed this bill due to their skepticism about big-government schemes.  Republicans hold a much stronger hand in the state senate; perhaps traditional conservatives will collaborate with union allies to halt or slow this move toward centralization.