0 Time to Make College Loans Dischargeable

This post has been revised following excellent additional information provided by Zakiya Smith of the Lumina Foundation and Rachel Fishman of the New America Foundation. Thanks!

Student debt is the worst possible form of debt in one critical way: it almost never leaves you.  You may be disabled, unemployed, or even dead, but you almost always still have to pay.

This "non-dischargeable"status is said to exist because there is no way to repossess the assets (your education) to pay off the creditors.  But that cannot be the only reason for this extreme rule. Instead, it's another example of putting bankers' needs above those of the average American.

Federal student loans technically can be discharged (while private loans cannot-ever) but it's a very difficult process and almost no one does it. Among those seeking a discharge, about 40% are granted, but only 0.1% of student loan debtors filing for bankruptcy have sought to discharge their loans.  Those who do file and succeed are often poor, unemployed, and having medical problems.  It used to be the case that loans were much more readily dischargeable.  All student loans could be discharged in bankruptcy until 1976. Student loans could be discharged after a waiting period (of initially five and later seven years after repayment was scheduled to begin) until 1998. Federal student loans became nondischargeable in bankruptcy in 1998. Private student loans became nondischargeable in bankruptcy in 2005.   Why not work to once again make both private and federal loans (more) dischargeable?

The pros are obvious -- students drowning in debt could declare bankruptcy and get a fresh start. Certainly their credit would be ruined for a few years, but since many aren't trying to buy homes and it's increasingly the case that it doesn't hurt job prospects, this isn't the end of the world. In addition, lenders might make credit less available, and I tend to think that will help to drive down the costs in higher education (yes, I partly agree with the Bennett Hypothesis).

The cons are less clear, if we put aside the powerful interests of the financial industry .  Would this give students incentive to go bankrupt? Recall that these are people who invested in postsecondary education and thus are actively trying to better their position in the world. They will not take bankruptcy likely, and those who treat it as anything less than a last resort will be a tiny minority (when bankruptcy was the same for student loans as all other loans, far less than 1% of federal loans were discharged this way). In fact, however, bankruptcy is critical in free market economies: it instills a sense of hope in the face of adversity.  In other words, there are both conservative and liberal rationales to support this effort.

So if we are not doing this, we have to admit that it's because we aren't brave enough to strong enough to stand up to the lenders.  An effort to make private student loans dischargeable again was introduced this year in the Fairness for Struggling Students Act and the Know Before You Owe Act and both failed.

Isn't it time for a change?  Can't we mobilize more broadly to advance this right now by pursuing reform in the Senate judiciary committee?

0 Get Smart About Student Loans

First, apologies for the long silence. My workload has increased tremendously post-tenure (sorry to disillusion anyone) and I'm having trouble keeping up with the blog. (This is why this post, so deserving of embedded links to sources, lacks them.)

Second, let me go on record as a supporter of the Occupy movement. Protest is powerful, period. The denigration of protest and attempts to make it look irresponsible, violent, and evil is a power tactic leveraged by elites. Ignore them.

Third, this post is a few thoughts for the OccupyCollege movement in particular. The battle cry against student loans is worthwhile but needs a more informed perspective. Yes, there is now more student loan debt than credit card debt. Yes, tuition and fees are high, and it's one reason for the growth in debt. And some schools leave students with more debt than others. Yes, Obama's recent plans will help, but only a little. Yes, this is problem that needs to be addressed.

But too little knowledge is dangerous. Protesters need to know and address the following in formulating their counter-proposals:

(1) Rising tuition is outstripped by a massive expansion of costs of room and board and student fees-- they are now the bulk of "cost of attendance." These costs are growing because colleges and universities think students are demanding them. They say you want climbing gyms, organic foods, and dorms at 2-year colleges. Do you--or don't you? Are you willing to get less in order to pay less?

(2) The growing reliance on loans is reflective of a turn away from grants, and it's not only a fiscal decision but a philosophical one. There has been push back against aid you don't have to repay, supported by a new claim that students benefit by having "skin in the game." There are accusations about the misuse of aid dollars, and discussion that states aren't getting much for their money since many students-- even middle-class ones--aren't completing college degrees. So why, they ask, shouldn't students foot the bill themselves?

(3) Colleges and universities and policymakers are loathe to rethink what being a student means, and adapt college requirements and scheduling accordingly. Large fractions of students now work, and must fit that work into their schedules. Work comes with benefits, sometimes-- which aid does not. So many students are going to work, no matter what. The fact that college doesn't accomodate work means that working students take even longer to finish college and that increases overall debt.

(4) Rising time to degree is likely a good part of the story about the ballooning debt. So those who oppose debt should join forces with those who seek to get more students to a degree in a timely fashion.

(5) Student debt, in and of itself, is not evil. When you borrow to buy a car, having that car does nothing to help you pay back the loan. But when you buy college, having the degree does help you pay off the debt. Moreover, unless you forsee some massive lottery winnings for the nation in the near future, we are never going to have enough money to meet the full financial need of everyone attending college-- and evidence suggests that grant dollars are most important and effective for students from lower-income families. So loans are likely to continue to be part of how students finance college -- the question is what fraction of the strategy should they be? By no means should students borrow to meet their entire costs of attendance, and by no means should they borrow to finance an overly expensive institution with low graduation rates. But a no-loans platform will not succeed.

(6) Yes some colleges have graduates with less debt than others. But be careful of conflating correlation with causation. Colleges enrolling wealthier students, those with larger endowments, and more investment from the state tends to graduate students with less debt. It's not like they are BETTER colleges because of that. And it doesn't mean that if you have less money and attend that school that you are guaranteed to graduate with less debt than you otherwise would-- you can't use averages to make decisions for individuals.

The biggest underlying problem facing our nation's college students is that many showed up to college totally unprepared for how to pay for it. They had next to no plan. They had no 'game' and neither did their parents. They went to college because they thought they were supposed to, and the colleges assumed they knew what they were getting into. That was wrong. There are dozens of different ways to pay for college and it requires research and education to make it work out for your own family. The goal should be to help all kids and parents get informed, and to help ensure that all colleges and universities do their due diligence in making that happen.