June 6, 2013
“My student loans, car payment + CC debt amounts to cost of a home in one of the more affordable cities. A Master’s degree in this economy seems to be a liability. I AM THE 99%” claimed one occupy protester. She was not alone. The occupy protesters, frequently lampooned by their detractors as having no central purpose or cause, identified student loans as a #1 concern of their movement.
A client once approached me with a problem: her student loan debt was beginning to drastically detract from her quality of life. Federally backed student loans are non-dischargeable in bankruptcy. And she found that despite being employed, her monthly student loan payments were too high. She would make payments, but the payments were not complete. Since collection attempts are charged to the debtor, and become part of the principle debt, she had noticed a troubling pattern. After each payment, she would receive a call from a debt collector. Since the bulk of the payment was against interest rather than the principle debt, the dent she was making in the principle through her partial payments was actually smaller than the additional principle that was being added, each month, by the debt collectors’ calls and subsequent letters. Though she had paid more money against her student loans than she had originally been lent, the principle debt was now larger than ever; and the servicers’ enforcement mechanisms allowed them to sidestep the usual costs of collection through tax refund garnishments, wage-garnishments and social security garnishments that were nearly self-enforcing. It didn’t make sense.
People like my client are now demanding a response to the problem of student loans, and the President has responded to their demands with a plan (which merely expands on a Bush-era plan – a staple of Obama’s presidency) that claims to meet the challenges posed by runaway student loan debt. The president’s plan would require qualifying debtors to make nominal payments against their debts in exchange for a big handout from Uncle Sam. The handout would go directly to the banks that are owed the debt. Through this plan, everyone wins: debtors see their debts erased, the banks are paid in full, and everyone gets to go to college.
The only people who lose are the American people.
The Obama debt forgiveness plan makes about as much sense as investing with Bernie Madoff: the banks offer student loans that they are assured will be repaid to them. The current easy-money Keynesian approach of our government allows it to back that assurance by borrowing money from the banks, or from foreign governments, so that they can pay down the debt of individual debtors.
Meanwhile, the price of tuition has risen exponentially over the last several decades. Explanations of that phenomenon offered by the universities themselves tend to focus on the cost, to the university, of providing an education. But the price of something is exactly what people will pay for it, rather than what it costs to produce it. How much does it cost to produce an Abercrombie and Fitch pair of pants? You don’t have to travel to Bangladesh to find out. Does the cost of production have any relationship with the value of the product, or what customers are willing to spend for it? Even Ben Bernanke would tell you no.
Market principles apply to education just like they apply to any other commodity. And the educational market has been manipulated by government for far too long. The creation of special regulations benefitting banks and lenders that provide student loans has meant that tuition prices are generated in a bubble: they do not have a true market. The consumer does not ultimately pay the price of tuition, and therefore has no incentive to negotiate a better price. Instead, students who wish to attend a college simply apply for a loan. Qualifying for a student loan is different from qualifying for a business loan. Since banks are assured of being paid back (education loans are non-dischargeable in bankruptcy, and nearly self-executing), banks do not concern themselves with details like the value of the commodity that they are financing.
What is an Art History major worth? How much earning potential does a student with a Masters in Philosophy have in the real world? These are all questions that banks do not have to answer. And students aren’t acquainted enough with the real world to ask these questions – particularly while they’re studying in the bubble-world of the average American educational institution.
President Obama’s proposal further insulates tuition costs from market realities. By foreclosing whatever slight possibility there ever was for a debtor to truly default on a student loan, he would ensure that banks could loans with reckless abandon. This would cause tuition to skyrocket even faster than previously thought possible. The final result of all of this would be to make college truly and utterly unaffordable to all but the wealthiest families – without the aid of banks offering federally backed, non-dischargeable, and self-executing tuition loans.
If colleges had to compete, on the free market, for their tuition money, tuition would be forced down. Perhaps if colleges were forced to balance their checkbooks like the rest of us, they would consider producing students with similar capabilities. Perhaps not. But if we want college education to truly be accessible to everyone, college tuition needs to respond to market realities.
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