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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  • Skelly

    So tell me if I am understanding you correctly or not.

    At the same time that you cite "Colleges... are supposed to be the engine of social mobility in this country, but instead are doing the exact opposite," you also suggest that the way forward is to open up the market and let the government choose (through tightened lending standards) whether or not it should loan money to a young person who would like to attend college based on relative risk?

    Here is your result: fewer lower class families with access to higher education.

    As someone who has nearly 6 figures in student loan debt, I'm all about finding a solution to our debt problems and shortening the leash on abusive for-profits, but what you posit serves no purpose other than to make certain that higher education remains primarily an accessory of the privileged class.  That is a step backwards, not forward.

    Incidentally, if as a student, I knew I could default on my student loans by filing bankruptcy, it would not "force me as a student to ask tough questions."  The answer would be simple - just go get the degree, file bankruptcy, and start your life.  What is the worst that could happen?  Would the government repossess your education? I don't think so.

  • Teresa Rothaar

    You wouldn't be able to "just go get the degree [and] file bankruptcy" anymore than you can currently "just go to Vegas on Friday, max out all your credit cards," and file for bankruptcy on Monday. There is a waiting period to discharge luxury debts (I believe it's six months, but don't hold me to that), and under current proposals, there would be a waiting period of 5-7 YEARS post-graduation before a student could file for BK...and then they'd have to pass a means test, so if they're making $80k by that time, no judge will allow them to write off a $25k student loan.

    Therefore, if your intent was to "just file for BK," you'd have to put your entire life on hold and live like a pauper for five to seven YEARS after you leave school. While it's possible that a few completely insane people would do that, the majority of the population would not want to put their life on hold for that long.

  • RGJ

    about the student taking some personal responsibility in the transaction?  Meaning; the student needs to evaluate the
    cost of the “education” they are about to receive vs. the market value of that “education”.  Put more succinctly, will my Women’s Studies
    degree allow me a career with which I can pay back my loan commitment?  If not, then I need to find a lower cost
    college for my Women’s Studies degree, or change my degrees choice to something
    more marketable.

  • Ana

    Does a Business degree guarantee a job that will help pay back a loan? It isn't the degree content, it's always the person. An idiot with a Marketing degree you can still wind up at the grocery store for the rest of their life.