Wednesday, April 25, 2012

Student Loan Forgiveness Is Downright Daft

Upon checking my inbox this morning, I saw an e-mail from the campus student government saying that there would be a protest about student loans on campus. Apparently, this has been going on throughout the country today. As to why we should forgive student debt, the e-mail read like this:

"The higher education system in the United States is in crisis. College tuition has gone up more than 400% since the 1980s, an increase that has far outpaced inflation or household income. Corporation and unaccountable administrators are turning college and universities from sites of higher education into debt factories for Wall Street speculators. Tuition increases year after year, forcing students to choose between their education and crushing debt. As a college education becomes more important, it becomes less and less affordable."

I don't deny that college tuition prices are out of control. The statistics on student debt are anything but inspiring. However, when I saw that there was a "forgive student loan debt" movement that is actually picking up some momentum, especially after Obama's recent speech, I began contemplating the ramifications of this ill-informed proposal. A few things came to mind:
  1. Students were not forced at gun-point to take out loans. They chose to take out the loans. Bearing the consequences of your actions is part of personal responsibility and should thus be incurred as a private cost, not a social cost. How is creating a social cost for private gain any different than bailing out the banks with TARP?
  2. Taking out student loans is like any other investment. It comes with risks. Not only that, some jobs come with higher rates of return than others (see Oct. 2012 data I added after initial publication of this blog entry). A major in a low-yielding field such as Creative Writing or Gender Studies is not going to earn you nearly as much money as a field such as Engineering or Computer Sciences, which is another way of saying that a college degree does not automatically guarantee monetary success. When choosing a major, the individual should assess the costs, the current job market (e.g., median salary, job perks), and what skills would be transferable to another career path in the event that the currently desired career path takes a hit in terms of job quality and/or number of jobs available. 
  3. Do you think that "debt forgiveness" honestly makes the debt disappear? For private loans, the government would be the one to reimburse the banks. For government loans, the student loans would just get added on the debt that is already over $15T and soaring ever-higher. In either case, the taxpayers, 70% of whom do not even have a college education, are footing the bill.
  4. If this actually passes, it would negatively impact lending in this country. Interestingly enough, Jewish law dealt with this issue more than 2,000 years ago. In Deuteronomy 15, Jewish law dictates that every seven years, all loans will be forgiven. However, Jewish society was running into a problem. As the seventh year approached, rich people didn't want to make loans, and as a result, the poor suffered. What happened was that a legal fiction called the prozbul (פרוזבול) that essentially postponed the payment in such a way that protected the rich person's investments that still enabled lending to the poor. What the rabbis two millennia ago realized is just as relevant today. Banks would never want to issue student loans again if student loans were forgiven, even if it were just for this one time. And it's not just the banking industry that would be adversely affected. Think of how much more difficult it would be to finance higher education without loans.  
  5. If you are going to complain that student debt cannot be forgiven under bankruptcy, which is a valid complaint, that is a matter of reforming bankruptcy law. Forgiving student loans would have no bearing on the law for future debtors. 
  6. People have been taking out loans for houses, cars, and for many other reasons. Why should those who currently own student debt be forgiven when people have been paying loans for years? Paying loans is a part of life. 
  7. Who is to say that this would be a one-time occurrence? This would set legal precedence to subsidize such consumer debt. If this ends up being a repeated policy, you will adversely affect the higher education market. Not only do you dealing with affecting the banking industry (See Point #4), but you distort consumer's decisions. Rather than take personal responsibility (See Point #1), the mentality will be "Oh, hey, I can go to whatever college and obtain whatever degree. If it doesn't work out, that's OK. The government will bail me out." Not only would individuals be risk-neutral, if not downright risk-seeking, but there would be a huge market inefficiency created.
  8. My final reason is that providing a lump-sum transfer to debtors who need to pay off student loans does absolutely nothing to improve the higher education sector.
How does forgiving student loans address, let alone solve, any of the issues plaguing higher education? Student loans do not lower tuitions to make college more affordable. They don't increase the quality of higher education or deal with the declining value of having a Bachelors Degree. This call for debt transfer is nothing more than special interest politics. The only decision that ends up being more idiotic than actually forgiving student loans is permitting the government subsidies that allowed this tuition inflation to occur in the first place. The bailout mentality is one that will create an increased burden of debt and ultimately leave to insolvency. It would be fantastic if the politicians in Washington could understand this, but the recently-drafted H.R. 4170 would suggest otherwise.

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