A fundamental principle of medical ethics is “Primum non nocere”: first, do no harm.
I was thinking about that as I read through the latest example of Congressional malpractice known as the Bipartisan Student Loan Certainty Act of 2013 (H.R. 1911). Its proponents claim the legislation will once and for all “fix” the student loan pricing problem by indexing the charge to the cost of 10-year government borrowing. However, the fact that the government doesn’t actually borrow that way when it funds its Direct Student Loan program suggests that what the Senate really accomplished was to tether this politically charged issue to something outside of their ability to control — then-current interest rates.
No wonder so many folks are so fed up by the government’s uncanny ability for making matters worse. But turning to the private sector isn’t the answer, because we’ve already seen what can happen under that scenario: Consumer-learners get lured into the predatory financing of unaffordable academic pursuits, despite less costly alternatives being available. Borrowers are continuously stymied by a bureaucracy that distances lenders from the inhumane consequences of their credit decisions.
Getting to the Bottom of the Student Loan Problem
Although their skirts are by no means clean in this regard, I firmly believe that only the government has the requisite resources to deal with the massive mess it’s helped to create. But not by enacting legislation like H.R. 1911 or taking similar actions as some states have done, because it only serves to institutionalize the unrelenting tuition spiral.
Instead, we should demand our representatives tackle this problem in a forthright manner by untangling the web of incentives that engendered it.
- The tax code should stop rewarding schools for being in any activity that’s not directly involved in the development and delivery of educational content. I’m talking about sideline businesses — such as hospitality, entertainment and real estate development — that are shielded by the schools’ tax-exempt statuses. On the other hand, the code should provide incentives for institutions that eliminate costly redundancies through mergers and regionally-inspired operational consolidations.
- The bankruptcy code should no longer punish financially distressed student loan borrowers whose debts are virtually prohibited from being discharged in court, especially when that emboldens private lenders to stonewall those seeking sensible loan restructures or much needed modifications.
- The schools should not only be held accountable for their academic outcomes — as many politicians and pundits insist — but they should also be held financially responsible for their failures when public money is involved. I’m talking about chargebacks that are linked to cohort student loan default rates.
- Student loans should be more fairly priced. If the government benefits by borrowing at the lower-cost, shorter-term end of the yield curve to fund its loan programs, so too should consumer-learners. And whatever interest rate add-on is needed to cover administrative and credit costs — such as for loan servicing, delinquency- and default-management — should be fully disclosed and rationalized in advance.
- The maximum value of the government’s Direct Loan programs should be limited to no more than the annual salary a college graduate can reasonably expect to earn on the other side of his or her diploma (good data for that can be found here and here). Assigning different caps to specific areas of study can make sense as long as long as the Public Service Loan Forgiveness program remains in place to support those who plan to dedicate their careers for the benefit of others. The duration of these loans should also be extended — for those who need the added flexibility — provided all borrowers retain the right to prepay their debts in full or in part at any time without penalty.
Left in the Dust
The greatest challenge we face at this moment, however, has less to do with the price of new student loans than it does the $1.1 trillion that has already been drawn down. And while the government has made a decent effort to address this problem, too many borrowers remain unaided because their loans have been deemed ineligible for one reason or another.
This needs to be remedied. Quickly.
The government should expand its relief programs to include all student loans — without regard for origination source (government versus private), payment status (current versus past due) or any previous action (consolidation, forbearance) — so that they can be restructured in a way that makes it possible for all borrowers to repay all their debts in full.
This compendium of measures — revising the tax and bankruptcy codes, holding schools financially responsible for their outcomes, fairly pricing and structuring student loans, setting sensible loan limits and, most important, forthrightly addressing the existing debt — make sense for the benefit of the borrowers, their benefactors (the taxpayers) and the economy as a whole.
It also makes sense for us a society because it’s not enough to do no harm — we must also do what’s right.
This story is an Op/Ed contribution to Credit.com and does not represent the views of the company or its affiliates.