28 June 2013

Two Thoughts on Student Loans

Th easiest way to get pageviews is to refer to student loans. (See some examples here and here.) The news is rarely good but I hope this post will at least be balanced. First the downside. To simplify matters go here to read Glenn Reynolds's opinion piece in the Wall Street Journal "What's Really 'Immoral' About Student Loans." Hint: it's not that student borrowers aren't going to be paying the risk-free interest rate suggested by Senator Elizabeth Warren. After all, on Reynolds's diagnosis of the problem, many underwater student borrowers wouldn't be helped even paying as little as zero percent interest.

Reynolds diagnoses the problem as one of an artificial subsidy, In other words, the rate of increase in the cost of tuition has exceeded inflation because students can get loans without any evidence of an ability to repay. No risk analysis, in other words. And where is all the extra tuition going, you ask?
A 2010 study by the Goldwater Institute identified "administrative bloat" as a leading reason for higher costs. The study found that many American universities now have more salaried administrators than teaching faculty.
Reynolds suggests that colleges and other beneficiaries of student loan largess have some skin in the game: "Schools that receive subsidized loan money could be left on the hook for a percentage of the loan balance if students default." So suggested I here (props to the president and Senator Rubio) but read here for why Department of Education efforts in this direction have been stymied.

Nothing that Reynolds notes should surprise my faithful readers. I already made his first point here last year. I've made some other observations about the subsidizing aspects of student loans one of which is their nondischargeability in bankruptcy (read here and here) and I'm pleased that Reynolds picked up on this too.

And on this last point--the nondischargeability of student loans--I want to hold out some slight encouragement. Listen to the American Bankruptcy Institute podcast Examining Supreme Court's Decision on the Meaning of "Defalcation." Not your cup of tea, you say? Perhaps not but here's why those burdened with overwhelming student loans might care: while the unanimous SCOTUS decision in Bullock v. BankChampaign addressed a different ground for nondischargeability of debt, the Court seemed to go out of its way to suggest that the grounds for nondischargeability should be narrowly construed. In other words, the "fresh start" principle is of primary importance, which further suggests that courts generally should broadly read the "undue hardship" escape hatch for student loan borrowers.

A long and winding two thoughts but one can hope that they may provide some direction or encouragement, as the case may be.

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