CovOps
 Location : Ether-Sphere
Job/hobbies : Irrationality Exterminator
Humor : Über Serious
 |  Subject: Student loan crisis shows how good intentions can bring bad results  Wed Dec 04, 2019 2:03 am | |
| I was talking with a friend about the student loan crisis when he told me a funny story.
It seems he went to a restaurant with about 10 people for drinks and dinner. When the bill came, one guy said he’d put it all on his credit card if the others would just pay him in cash.
Later that guy told my friend he was going bankrupt in two weeks. The many thousands he owed on that and other credit cards would be wiped out by the court.
This is hardly uncommon. Current law permits people to dispatch their credit-card debt regardless of what they used the money for — bars, restaurants, trips to London and Paris and so on.
But there’s one debt they can’t go bankrupt on: Higher education.
That’s how we got into this mess, said one college professor who also dabbles in politics. Murray Sabrin teaches finance at Ramapo College. He’s also run for statewide office in New Jersey as a Libertarian and a Republican.
Sabrin said economists have a name for the problem that has left Americans facing $1.5 trillion in student-loan debt: “Moral hazard.”
Moral hazard occurs when someone has an incentive to take risks that somebody else might end up paying for.
In this case the federal government backs loans to students who will not necessarily generate the income to pay them back. If this were any other kind of debt, the debtor could declare bankruptcy.
But Uncle Sam doesn’t like to be treated the same way that other lenders are treated. So in 1976 Congress passed a law saying that student-loan debt, whether public or private, could not be discharged except for those who could prove “undue hardship.” In 2005, the law was tightened up to the point where it is almost impossible to get the debt dismissed.
“This is another example of why the saying, ‘We’re from the government and we’re here to help you’ is one of the great myths of all time,” said Sabrin.
Theoretically the law benefited students by encouraging lenders to offer them money. In reality, many of the students were offered loans they were unlikely to be able to pay back, especially if they got liberal arts degrees.
“If you’re dealing in the soft majors, there aren’t many job opportunities,” Sabrin said.
Even those who find jobs quickly discover that the loan repayments can eat up most of their income.
“If your take-home pay is $35,000 a year and you gotta pay $1,000 a month in student loans, that leaves you with $2,000 a month,” he said. “You’re basically forced to stay at home with your parents. Student loans have really thwarted family formation and people’s mobility.”
They have indeed. Some have pinned the recent drop in birth rates to student-loan debt that lingers through the child-bearing years.
As a libertarian, Sabrin said he would have preferred that government had stayed out of the loan business altogether.
“But colleges saw there was an endless sum of money coming from student loans, so they could raise prices,” he said. “They can zap up prices at a rate much greater than the rate of inflation.”
Which they did. When I went to Rutgers in the early 1970s, tuition was about $600 a year. That would be about $3,000 today if tuition had risen at the rate of inflation. But the current tuition is four times as much, about $12,000 a year.
But imagine if those loans were subject to discharge in bankruptcy. Banks would be reluctant to lend, and colleges would have to cut their costs if they wanted to remain viable.
In the case of the state colleges, the Legislature would have had to increase state aid. Thanks to that influx of loan money, state aid ran well below the rate of inflation under both Democratic and Republican administrations over the past few decades.
How do we get out of this mess? On the Republican side, President Trump should be sympathetic to equalizing the bankruptcy laws given the number of times he’s had businesses that went bankrupt.
On the Democratic side, Joe Biden’s been catching a lot of heat from his fellow presidential contenders because of his role in pushing that 2005 law that tightened the definition of “undue hardship” to the point that it is almost impossible to get out from under student-loan debt.
Many academics opposed that bill. In an unfortunate coincidence for Biden, one of them was a Harvard Law School professor by the name of Elizabeth Warren.
The Guardian reports that Warren said at the time that the legislation would “fall hardest on women.” She accused the then-senator of backing the bill because “he is a zealous advocate on behalf of one of his biggest contributors — the financial services industry.”
Well, they certainly got their money’s worth — even if a lot of college kids got stuck with the bill
https://www.lehighvalleylive.com/opinion/2019/12/student-loan-crisis-shows-how-good-intentions-can-bring-bad-results-opinion.html |
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