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Crowdsourcing the Student Loan Mess

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For the record, I am not now, nor have I ever been, a member of the Hitler Youth. I point this out because based on the comments to my last few columns (which focused on the idea that a National Service Corps could help solve our student debt crisis) it would seem that some of you — not too many, thankfully — seem to think I’m affiliated with the organization. This, as you can imagine, is a bit troubling for a nice Jewish boy from New Jersey.

Here’s an example from commenter JakeFlagg:

“National Service. Didn’t that idea come from the National Socialists of the Third Reich? Hitler Youth? Of course it did, and this ‘admin’ has been on a fascist tear that Americans can hardly believe, but ought to, since we’ve essentially had fascist ideals in place since the 1920’s.”

Then… there’s this:

“Soon nearly 90% of the country will be branded as terrorists,” LSummers29 wrote. “Stock up on food and ammo or face imprisonment Hitler style, it’s your choice.”

[Related Articles: The Other Student Loan Slow Jam: Is It Time for a National Service Corps? and It’s Time to Solve the Student Loan Crisis]

Check Your Credit For FreeNot everyone was so incendiary. Many recognized that we indeed have a big problem, and offered ideas for a solution. After all, Americans now owe over $1 trillion in student loan debt, more than they owe on their credit cards. As real wages for most American workers stagnate and full-time employment for recent grads becomes the exception rather than the norm, college debt is becoming the anvil that hangs from the neck of many graduates. Something needs to be done.

Many commenters suggested an attitude adjustment (in the most positive context) on the part of students to take on less debt, and make sure they can repay the loans they do receive, which isn’t at all unreasonable.

“Just like credit card debt, folks need to take resposibility (sic) for spending what they do not have,” wrote RAH12345.

Others suggest that students now do what many of their parents did — think “work, not “debt” and take part-time jobs to help pay for school.

“It took me 12 years to graduate debt free,” said a commenter using the screen name litnakaro. “Worked full time, went to school fulltime or part-time depending on what I could pay for with cash each semester.”

But while changes by individual students obviously can make a huge difference, I think we need systemic changes to fix a systemic problem. That requires changes in government policy, especially when it comes to higher education, where federal funding plays such an overwhelmingly decisive role.

To that end, here are three ideas for policy changes from our readers that I found most intriguing. Some of them could work in conjunction with the National Service Corps, while others would stand-alone. I’ve also included my own thoughts regarding their impact and feasibility.

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1. Skin In The Game


“All higher education loans are guaranteed by the university endowment. Graduate of a university like University of California Berkeley defaults. The University of California Berkeley endowment repays the taxpayers. Watch UC Berkeley graduate default drop like a rock!”

William concurs:

“Have the federal government lend at 1% to the schools. Have the schools lend at 2% to the borrowers. The total period for the loan is ten years. If the borrower cannot pay, the school is on the hook to the federal government. The schools become banks, the school is also the guarantor. The taxpayer is protected. Watch crappy degrees disappear and degrees get cheaper. In the event that the borrower cannot find a job, the borrower is not obligated to pay during their time of unemployment during that ten year period. Make the colleges have a vested interest in helping that graduate find a job rather than sticking them out into the wind to twist.”

Moravecglobal and William make an excellent point. Today, colleges and universities have little financial incentive to rein in costs. Why should they when the government and private lenders dole out student loans like candy canes at the Santa Chair in malls — not to mention the fact that the debts are non-dischargeable in bankruptcy? And in case you missed it, the New York Times recently ran a great article about the student debt crisis which featured this shocking statement from E. Gordon Gee, president of Ohio State University.

“I readily admit it… I didn’t think a lot about costs. I do not think we have given significant thought to the impact of college costs on families.”

I’m all for proposals that impress upon all the stakeholders — students, universities, government, private lenders — the severity of the issue. These suggestions make one wonder: What do we have to do to make colleges start taking this problem seriously?

2. Reinstate Recourse

Allan Collinge, founder of StudentLoanJustice.org:

“I have an even better idea: return the standard consumer protections that should never have been taken away, such as bankruptcy statutes of limitations, refinancing rights, and others.  It is the removal of these protections that enabled the runaway inflation we are seeing, and similarly it is the return of these protections that will put college prices back in check. Beyond that, I look forward to alternative payment proposals such as what the author puts forward.”

Student loans may seem like any other kind of debt. They do come with interest rates, after all, and they require monthly payments.

But in point of fact, they are quite different. More like tax obligations, student loans almost never go away, even after a borrower declares bankruptcy. And if consumers default on student loans, their options for refinancing are often significantly more limited than with mortgages or other types of debt.

While I agree with Alan in principal, the combination of seemingly unlimited student loan money from the government, and the reinstatement of bankruptcy options, could unleash a wave of chapter 7 bankruptcies among recent graduates. However, assuming the government continues doling out student loan money at will, we should consider allowing student debt to be recast in a chapter 13 bankruptcy, which could reduce principal and interest rates for graduates in real trouble.

3. Get the Government Out


“As long as easy money flows from governments to students’ accounts to the universities, the universities will not need to cut costs … or even try to cut costs. Further, many public institutions receive funding directly from the governments. So why is tuition so high then? I assert that in most cases we will find that tuition is legislated to be some proportion of revenues. If a university requests, X in revenues then tuition is set at Y% of X. If X is based on costs of previous period, then X will continue to rise with inflation and special programs du jour. Thus Y% of X will rise too. Since universities don’t “enjoy” the free market feedback loop of losing dissatisfied customers (for every drop out, the government has another student in the queue for a Stafford grant), they have little incentive to reduce costs in a consistent meaningful way to “stay in business”. Therefore, to fix this looming Tuition loan tsunami, get the federal government out of the business of education funding. Let the market place correct the distortion. Let the prices fall back to the levels that a student can work and pay or save for college in a meaningful way rather than the life long 529 plans that so many have to use today (another federal government market distortion mechanism). But certainly, another Federal program isn’t going to solve the problems generated from a Federal program.”

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KB9TTX wasn’t the only commenter to express this sentiment. A number of others pointed out that one reason why college tuitions are rising so quickly now is the same reason why residential real estate prices shot up during the 1990s and 2000s: There’s just so much money to borrow.

Unlike the mortgage bubble, however, which was driven by banks looking to make big profits from securitization fees (Fannie and Freddie notwithstanding), this time around most of the money is coming from the federal government.

On the one hand, I absolutely agree. The current system offers no effective check on tuition costs, and likely does play a major role in fueling tuition inflation.

On the other hand, it’s hard to imagine how to extricate the government from the present scheme without causing chaos. If government support for student loans went away immediately, America’s system of higher education could conceivably crumble.

Phasing out such support gradually also raises all sorts of thorny questions. Would art majors be the first to lose federal subsidies? Or would the reductions be made by type of institution, possibly with controversial private for-profit universities losing support first? While it’s easy to see how government spending is helping to fuel tuition increases, I have yet to see any concrete steps for how such a change might be implemented.

Solving this problem will take time, and I thank all the commenters, even the ones who think I’m a Nazi, for taking the time to think about the issue and what we might do about it.

[Student Loans: Research and compare options for student loans at Credit.com]

Image: Will Hale, via Flickr

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