07 May 2014

Elizabeth Warren Gets It Right? More on Student Loans

While I use two of her books in law school classes (to be more specific, two books in which she's listed as a co-author), I've had little regard for the political views of Senator Elizabeth Warren (D-MA). Sure, she's very bright and can speak with a folksy Oklahoma twang, but she seems more interested in increasing federal control of greater swaths of the economy than decreasing corporate power through agency capture. But I digress.

Go here to read about a bill that Senators Warren, Durbin, and and Reed have introduced that would permit student loan borrowers who are paying high interest rates from old loans refinance at today's lower rates. I'm not crazy about this part of their proposal--after all, who's going to pay the lenders who will suffer the loss of expected interest income? Taxpayers, of course. (But only rich ones, the sponsors hasten to add.)

The second aspect of the proposal makes more sense: restore the bankruptcy dischargeability of private student loans. As I have observed on repeated occasions (check here, here, and here), the 2005 change in the Bankruptcy Code that made private as well as federal student loans virtually nondischargeable eliminated the discipline of the market and has helped fuel the rise of for-profit colleges that provide little education for the tuition they charge. Permitting students to discharge such loans would provide the incentive for lenders to investigate the value of the education their borrowers will receive. Sure, some folks will no longer be able to get a college "education" because there's no hope they'll make enough money to pay back a loan but that's a good thing, isn't it?

Given the all-Democrat lineup of legislative sponsors, there's no way this bill will go anywhere. (For some decent analysis, go to slate.com here.) Yet one hopes--at least I do--that the student loan situation will continue to  garner enough political traction that Congress eventually does something to resolve the mess before the bubble bursts with the next economic downturn.

(BTW, those who count out Senator Warren for the Democratic presidential nomination in 2016 should remember that Mrs. Clinton was "sure" to get it at this stage of the process eight years ago. Didn't quite work out that way.)

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