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The Bright Side of More Expensive Student Loans

Yes, the college-financial complex is morally bankrupt, but there is a way forward.

Monday's news that the interest rate on federal student loans will double to 6.8 percent, was only the latest in a depressing barrage of stories about the cost, price, and values of higher education in the 21st century. Some examples:

  • Who's the most highly-paid employee of your state? He (almost always a "he") works for a state university, either as a football coach, university president, or at a medical school.
  • Want an interest-free loan on your vacation house? Try being as a star faculty member at NYU.
  • Being full-time faculty sound like too much work? Maybe you should get an adjuncting position at the City University of New York, which pays $25,000 a year—unless you are a celebrity like disgraced general David Petraeus, in which case you can pull down $150,000 a year for teaching a three-hour seminar.

All these news stories point to the same sad development. Colleges, especially our public colleges, are supposed to be the engine of social mobility in this country, but instead are doing the exact opposite, magnifying the maldistribution of wealth by charging prohibitive amounts of money to attend and creating a star system among their own employees. The student loan finance system, created in the late '60s and early '70s to make college affordable for the middle class has, unfortunately, driven this trend. "Cost shifting" is the term used by education researchers to talk about public universities responding to cuts in state funding by increasing tuition. Students' ability to borrow is key to universities' ability to cost-shift.

Since the recession, student loan borrowing is climbing. So are default rates. There is an entire sector of colleges, the for-profit sector, that subsists almost entirely on federal student aid, targeting working-class students. They account for 47% of defaults even though they enroll just 13% of students.

There is one way to stop the misery and it's not by cutting the interest rates on federal student loans. Providing students with even more very cheap money to hand over to colleges will only hasten the inevitable crash.

The way forward is to let the market step in, by reinstating bankruptcy protections for federal student loans. This would make it possible for cash-strapped graduates to walk away from their loans and thereby provide a huge boost to the economy. It would prevent thousands of lives from being ruined, which is great if you're into the whole karma thing. And it makes sense economically. Today, if you default on your loan, the government has the power to collect until the day you die. The looming risk of bankruptcy would immediately tighten lending standards, forcing the government, colleges, families, and students to ask tough questions about a particular student's chance of graduating from a particular program, and that graduate's chance of finding a job. The free-rider for-profits that suck up student loans and spit out defaulted and deflated graduates, would go out of business, and ultra-low-cost providers with a quality service (Straighterline, WGU) would shine.
Bankruptcy would restore the badly needed disciplines of due diligence and real competition to the higher education marketplace.

If Congress's failure to act this week on the doubling of federal student loan interest rates has the effect of forcing a deeper consideration of student loan reform, then education lovers everywhere might just start celebrating July 1 as Student Loan Sanity Day, the beginning of a new kind of independence.

[Image: Flickr user Drew Saunders]

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