Like many stores, we broke it, so now we own it. As a nation, we need to figure out something to do with student loans. Most of their characteristics are a result of federal law. I want to explore some changes to it and think about where those changes might take us. There's something about a debt that cannot be discharged in bankruptcy that strikes me as fundamentally unjust.
So what are the characteristics of student loans now that make them different from credit cards, car loans, or mortgages?
- They don't have any collateral (like credit cards, but unlike car loans or mortgages)
- The federal government guarantees most, if not all, of them to the banks that made them.
- They cannot be discharged by a foreclosure, repossession, or even a bankruptcy.
Since they don't have collateral, there's nothing to seize upon default. But since they're guaranteed, there's not an incentive to check the risk of the loan. As the joke says, "The science major asks, 'Why does it work?' The engineering major says, 'How does it work?' The business major says, 'How do I make money from it working?' The liberal arts major says, 'Would you like fries with that?'" Different degrees result in different prospects for their holders, and so would carry different levels of risk for banks to make those loans.
1. Eliminate the guarantee from the federal government.
If the guarantee was eliminated, the bank would have an incentive to actually analyze the possibility of repayment based on the course of study and progress through it. For instance, a bank might be willing to fully subsidize a bachelor's degree in engineering from MIT, but pay for only a small part for a degree in women's studies from Radcliffe, based on future earning potential of those students. Of course, if the bank is taking risks on these students, these loans might be subject to some qualifications like sending transcripts to the bank, and have future loans conditional on keeping up your GPA and making good progress on your degree. This would also make the banks take part of the risk that, upon default, they don't get any money. It's my understanding that the federal (or state) government repays the bank so they know there's no risk, and your loans are now owed to the government.
2. Make them dischargeable, but painfully so.
It is most definitely unjust to hold a debt for life over someone's head, especially when the entity owed is a bank or a government. In the Mosaic Law, debts were released every fifty years. Make the student loans dischargeable, but instead of being able to do it in one bankruptcy and you're done in seven years, make it take three bankruptcies so that the effects will be felt for over two decades. This gives the student some skin in the game, but makes escape possible.
If these two changes were made, both banks and students would have incentives to take loans only when necessary, and only when the risk to reward ratio is positive. I'm sure other programs could be developed, like allowing co-op programs at various corporations to pay for education, similar to how ROTC scholarships or Service Academy appointments obligate their recipients to several years of service. What would some of the effects be if these changes were adopted?
Hopefully, it would get rid of some of the factors that created the higher education bubble. If banks faced the default risk on their own, there wouldn't be nearly as much money pouring into college campuses as there is now. If you read
Instapundit on this subject, you'll be swayed by the evidence he shows that there are more dollars than sense going into higher education right now, just like the housing market a few short years ago.
There would be fewer college students overall. If loans won't cover their course of study, then many people would not choose to go to school and enter the work force full time at a younger age. There would be a chance for them in skilled trades or other careers.
Many jobs that currently "require" a BA or better would look at the supply of available candidates and drop that requirement. Apprenticeship-type training may make a return in several industries. Instead of learning how to be a bookkeeper by studying accounting in college, someone would start as an assistant bookkeeper and learn the business from the inside. Too often, a degree is used as a proxy for measuring whether a person can hold their life together enough to achieve a long-term goal. This might bring more risk in hiring someone new, but the ability to not have our government swamped by these loans would more than make up for it in my opinion.
Some majors would shrink, others would grow. If the average starting salary for someone with a BS in engineering was $50,000 and the average starting salary for someone with a BA in English was $28,000, banks would be more comfortable making loans available to engineering students, because they would be more likely to get a better return on their investment. This would probably raise the ratio of STEM graduates overall. Of course, if a teaching certificate is added to that BA, the state or school district might promise to make part of the payment themselves, reducing the student's obligation. Using programs like that should keep a large enough supply of teachers coming up through the schools.
University town economies would probably shrink, as fewer students would result in fewer needs for the campuses, lower populations, and a general decrease in economic activity. This would be like many of the disruptions that came before, when great numbers shifted from farm to factory or factory to service.
If all goes as hoped, family formation could start sooner because there would no longer be such an overhanging debt on so many people who currently need to "punch their ticket" to get into adulthood.
I see some downsides to this in specific cases, but most of the results are, I think, positive. What do you think would happen? What measures would you suggest to get out of the higher education bubble?
