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Student Loan Forgiveness

posted by Adam Levitin
Sometimes it’s helpful to read media stories on separate topics against each other because of the disconnects they underscore. That’s been on my mind today with federal student loan debt.
First, it’s hard not to notice the juxtaposition of the announcement of the Biden administration's student loan forgiveness plan with media coverage of the increased cost of college tuition, which is over $100,000/year for tuition, room and board for freshman year at Vanderbilt, for example. The juxtaposition underscores one of the major problems with the loan forgiveness plan:  it does absolutely nothing to rein in costs going forward. What’s worse, it probably encourages schools to raise their tuition, because it creates an expectation of future loan forgiveness if debt burdens are too high.  (This of course assumes that schools engage in profit-maximizing behavior when setting tuitions...) Put another way, loan forgiveness without cost controls creates a systemic moral hazard problem. That it is being done in an election year only raises the moral hazard as loan forgiveness as it becomes a type of patronage move.  
 
Second, the attention to the possible impact of the Capital One-Discover merger is a reminder that student loan debtors almost always have other, private creditors. Our current bankruptcy system operates as a type of mutual credit insurance program, mutualizing losses among creditors, rather than sticking them all on one creditor. Yet loan forgiveness means that the problem of over-leveraged student loan debtors is all being borne by the government, which means it is benefitting credit card issuers, auto lenders, and mortgage lenders at the expense of taxpayers. To the extent that student loan debt burdens are reduced, it increases capacity for debtors to repay other creditors. I’m fine with reducing the burdens on over-leveraged student loan debtors, but I don’t see why it should benefit private financial institutions.  (And if you’re really worried about a knock-on effect, student loan debt forgiveness should put upward pressure on housing prices. There will be more people able to enter the homeownership market, which is a good thing, but with a limited housing supply, it will inevitably mean that housing becomes even more expensive.) 
 
Now one can recognize that these are valid criticisms and yet still conclude that it is better to forgive excessive student loan balances than not. There are costs to inaction as well as to action, and past policy failures mean we have amassed a huge legacy student loan debt problem within our system. Yet we need to also recognize that debt-forgiveness is never without collateral consequences. That is why I hope that going forward we will see all federal student loan borrowers in income-based repayment programs combined with some sort of cost-constraining metric tying federal funding to tuition levels. Put another way perhaps the way to start thinking about education finance is actually more like an insurance program, where the federal government will pay some of the costs, but will demand a co-pay and will also only insure if there are cost caps.  

Comments

I think the federal government should sue every college/university that has accepted federally backed student loans for fraud, because the degrees are demonstrably not worth their price and all the marketing is completely deceptive. I think the resulting settlement/consent decree should 1) cram down all student loan debt to the present market value of the degree (a complicated calculation, but must be mostly based on graduates' earning potential from the degree) and 2) require schools that accept the backed loans going forward to do the major restructurings required to drive down cost (e.g., shed massive amounts of administrators, cut top end salaries, cease the pointless investment in ever fancier dorms/dining halls/non-academic infrastructure).

Fair points. Fixing the student loan discharge exception in BK would go a long way - make them dischargeable 5 years from date of last attendance. And Capital One & Discover issue tons of private student loans that also are generally not dischargeable as the law is currently written.

I forgot to add the other possible fix is to make student loans dischargeable only after completion of chapter 13 payment plan.

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