Speaking as a guy who’s been writing student loan checks for more than 10 years now, I keep wondering how these various demands for student loan debt forgiveness would work. What happens to people who paid off or have mostly paid off their loans by the time one of these forgiveness plans kicks in? Do they get a refund? Or are they just out of luck? What about people who work their way through college and never accumulate any debt? Do they get a check? (It’s a similar question you might ask about renters with these demands for debt forgiveness for owners of bad mortgages.)
I talked to an economist last month who said his advice to recent grads would be to only pay your student loans after everything else. If even then. Get deferments and forbearances, even if you don’t need them. They don’t really hurt your credit rating, and if political momentum continues to build toward some sort of massive federal relief program, you’re screwing yourself if you go out of your way to pay down your student loans just before the government declares them null.
Debt forgiveness also wouldn’t do much to address the reason for the debt in the first place—the exploding cost of a college education. In fact, there’s good reason to think it’ll make it worse. If debt doesn’t matter, there’s even less incentive than there already is (which isn’t much) for buyers of higher ed to factor cost into their decision about where to enroll.
None of which is to say the Occupy folks and others upset about student debt don’t have a point. College has become insanely expensive. But federal loans, grants, and subsidies are a big reason why. They’ve created a lopsided seller’s market for higher ed. When you have way more applicants than you need, there’s zero incentive to control costs. Unfortunately, most of the people upset about this issue seem to favor that involves yet more federal involvement in higher ed, up to and including just having taxpayers supply a free college education for everyone who wants one. (Bonus points if you think the government should pay for everyone to go to college and you’re really concerned about how manufacturing jobs are leaving the country, and that “America just doesn’t make things anymore.”)
Anyway, this idea from Glenn Reynolds makes a lot of sense:
I think we should return to the days when student loans were dischargeable in bankruptcy, starting five years after graduation. This will allow graduates who are unable to pay to get out from under what is otherwise a potential lifetime of debt-slavery. If you buy a house to flip, and wind up losing your shirt, we let you go bankrupt, take a credit-rating hit, and scrub the debt away. Why should graduates be forbidden from doing the same? The five-year delay means that you can’t use immediate post-graduation poverty as an excuse (as some medical students used to do), but still provides an out.
But the real incentive-alignment part is this: Put the institutions who issued the degrees on the hook for the money they received. Making them eat the entire loan balance would probably bankrupt a lot of colleges (though that should tell us something about the problem right there), but sticking them with even a small fraction — say, 10% or 15% — would be enough to inspire a much greater degree of concern for how much debt students take on while in school, and for how likely they are to find gainful employment after graduation.