Need for Student Loan Reform Now

2021 update: Student loan reform may be coming with the Fresh Start Through Bankruptcy Act introduced in the Senate. If it becomes law, this  would give the prospect of student loan forgiveness through bankruptcy.

A long time ago, in the days of Charles Dickens and chimney sweeps, people were jailed until they satisfied their debts. These debtors’ prisons resulted in a Catch-22. You can’t get out of jail until you paid your debts. And you can’t earn money to pay your debts until you get out of jail. There’s now a new modern debtors’ prison which raises the need for student loan reform.

The New York Times recent writes of a new program to enforce repayment. If someone falls behind on their student loan payments, they can lose their professional license and their job. Example: states could pull the license of a general contractor behind on school debt. Without income, this guarantees one thing: he can’t pay his student loans.

Student Loans are the Problem, not Debtors

Student loans are the second highest kind of household debt, after mortgages. There are a lot of reasons for this. Firstly, the federal government subsidizes the Big School industry, encouraging high tuition costs by guaranteeing them with programs like Direct Loans. If payments aren’t made, Uncle Sam can seize a tax refund, bank accounts, garnish wages, and seize other assets. And bankruptcy court can’t help, as education debt can’t go away in a bankruptcy.

College Industry is Overpriced Churning Out Poor Product

Overpriced

Because tuition costs are subsidized, why should schools compete? Let’s face it, if you knew you could sell a glass of lemonade for $1000, by getting people to go into hock for it, why would you ever settle for only get 25 cents a glass?

Colleges are one of the few businesses not encouraged to compete to be the most affordable. The average student leaves school owing almost $40,000. Over 70% of graduates leave college with debt, starting their new career with a burden on their back. Americans owe $1.3 trillion in student loan debt, over 2.5x more than a decade ago.

More Competition for Jobs

As more are told to go to college, standards for getting into college are getting lower. Students are sold a bill of goods and pot of gold on the other side of graduation. As a result, more people are getting into college, causing more job competition after graduation.

The Student Loan Bubble

This creates a student loan bubble, or student loan crisis. More graduates are in the job market leading to stiff competition from other college graduates. Some settle for lower-paying jobs, causing more unable to pay for their student loans.

Universities win, because they can charge whatever they want. The government wins because the graduate can’t ever escape from its debt.

Most incoming students aren’t comparing costs. They look more at school prestige, or maybe its sports programs. They think they win. Until they graduate. Then they realize that they often can’t find a good-paying job easily. Or the job they could find pays much less than needed.

Faced with a choice between paying student loans or rent and food, graduates choose the budget basics. The student loans get let go.

School Debt Reform

We need student loan reform. A solution is to cut payments for the student loans, and future tuition costs. Another idea is to get the government out of student loan business. Why is it even there in the first place? Or bring the wayward sheep back into the fold by increasing forgiveness programs that waive interest and penalties so the trapped graduate has a way out.

We Need Bankruptcy Reform on Student Loan Debt

Also, student loan reform of the bankruptcy code. Student debt reform is needed so that more can discharge (get rid of) school debt in bankruptcy. Bankruptcy isn’t helping if the second largest form of debt is untouched. Lower the bar, so if graduates aren’t earning average income a decade later, the schools don’t get paid. Imagine what that would do to admission rates.

License-Pulling Makes Repayment Less, Not More, Likely

Government should be making change to help defaulting graduates can pay their student loans. It shouldn’t cut the source of income. We’re through the looking glass: if you don’t pay your bills we’ll take away your job so you can’t pay your bills. If we punish people who default on student loans, it only ensures the jobless graduate makes less money. It makes it more likely they’re dependent on government programs. Finally, it puts defaulting graduates in a modern debtors’ prison that says they’ll get their license to earn money back as soon as they give enough money to pay their debt.