Katrina vanden Heuvel suggests that we simply forgive the college loan debt, after a certain period of time.
Rep. Hansen Clarke, a Michigan Democrat, introduced a bill that would forgive up to $45,000 in student debt after a borrower makes 10 years of income-based payments (no more than 10 percent of income). A petition in support of Clarke’s bill has more than 900,000 signatures.
What do you think of this idea?
Apt. 11d 
Kind of hard luck on anybody who didn’t borrow $45k, isn’t it? From then on, there would be no incentive to avoid that kind of debt, which as we’ve discussed, is actually fairly unusual. The hyper-borrowers make entertaining reading, but they are special in a variety of ways (i.e. a disproportionate number of them seem to have gone to NYU).
Instead,
1) Make student debt bankruptable again. Sure, people can get rid of it through bankruptcy, but then it goes on your “permanent record,” which is a pretty adequate punishment. For the rest of your life, if a form says “Have you ever declared bankruptcy?” they’ll have to say yes. In the electronic age, that sort of information is immortal. Given the way that higher education is bundled with various consumer goods and that it is possible to use student loans for credit card type expenses, I don’t think you can draw a clear line between student loans and plain old consumer debt.
2) I think it’s wrong-headed to start from the forgiveness end without talking about ballooning costs and why they are ballooning, which is at least partly due to availability of credit. This plan doesn’t address that. Start from the other end–create something like an 80/20 loan system for college so that if the college wants the feds to guarantee 80% of the loan, they’ll need to hold the other 20%. I think even that very minor move would lead to lots of pencil sharpening. One thing you have to admit about colleges–they understand money very, very well.
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Of course, some of this is pure sadism on my part. I was reading some snippets from student loan articles over at Rachel Lucas’s and found these especially choice.
“Protest organizer Katie Zaman, a Wisconsin Ph.D. student in sociology with $111,000 in debt waiting for her when she graduates in three years, suggested the federal government forgive all student loan debt, especially after bailing out big banks that had lost huge sums because of risky investments.
“It’s not going to be worth it. I might as well have not come to graduate school. I might as well be working at Starbucks right now,” said the 35-year-old single mother, who has two graduate degrees.”
Wow, that is some excellent financial planning, there.
Hadi Nassar, 31, whose eight years of undergraduate and dental school education has left him $186,000 in debt, said he was having to rethink his plan to work at a community health clinic.
“It makes me angry. It makes me not want to do what I set out to do – which was, help people, take care of people,” said Nassar, a dental resident. “That type of job isn’t going to give me enough income, monthly, to pay this off.”
“…First-year law school student Lauren Adams, 25, said she will owe about $135,000 when she graduates from the university with a law degree. Adams expects to go into public interest law where the salaries are much less than salaries at private law firms.
““That debt is on my credit … so it’s going to be really hard to get an affordable mortgage to buy a house,” she said, standing outside the law school building on Bascom Hill. “It really concerns me.””
As Lucas points out, “Easy solutions are at your fingertips, kids! Go into private practice, make more money, pay off your debt that you accumulated all by yourself, and then you can go work for your community’s health and the public interest. Meanwhile you’ll be furthering everyone’s interests by being a contributing economic member of society who pays off your own debt. We the taxpayers do apologize for what must seem like an insolent affront but please pull your own weight anyway, that’d be great, thanks.”
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1) Make student debt bankruptable again
I think that would solve most of the problems (unless it was paired with a too-high government guarantee or something). I think this crash showed pretty clearly that bankruptcy does as much to protect lenders from themselves as it does to protect borrowers.
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I think this is looking at the wrong end of the problem. If we’re willing, as a country, to support higher education, we should make universities more available in the first place. I’d be happy if state governments would stop reducing contributions to public universities. If federal or state govts could contribute even $10K (more) per student, I’d be thrilled. Needs-test it, merit-base it, whatever.
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This is sort of already available for graduate student debt (well, it’s forgiveness after 10 years’ worth of payments while working in the public sector, or after 30 years working in the private sector). I and a number of people I know are betting on this for getting rid of the law school debt (if you come out of a private law school with $150-200K debt it’s pretty difficult to work as a DA or PD without the income-based adjustment).
Speaking purely selfishly, I think debt forgiveness is GREAT! But it does seem to reinforce the degree = job/economic success equation, in that it seems to say, if after 10 years of work you haven’t made enough money to pay off your student loan debt, then it’s okay not to have to pay them. Like, okay, we’ll admit you didn’t get out of your degree what you should have got out of your degree, so you don’t have to pay any more for it. On the one hand, that kind of makes sense, but on the other hand, I don’t think the value of a degree should be only about how much money it nets you. (Hypocrisy alert: I’m much more willing to that professional degrees are about economic/job success than undergrad degrees, though I don’t know how defensible that position is; conversely, you could argue that a BA is de facto mandatory these days, whereas professional degrees are more “optional” and therefore you should be more stuck with the debt?)
But anyway, I do agree that making student loans dischargeable in bankruptcy would be a great step. Bankruptcy has serious costs, so it’s not a get-out-of-jail-free card, but it would allow people who need it to start over. There are horror stories of law school grads whose state bars won’t admit them because they have too much student loan debt, but then they can’t practice law, so how are they supposed to do anything about the debt? If they could have got a job enabling them to pay off the tremendous debt without going to law school, they probably would have! (Admittedly, one of these cases that I know of involves someone with $425K+ of debt who has something like four degrees – including an expensive British one – and has apparently never made a student loan payment. I don’t have much sympathy for him. But the other case I know of is much less egregious.)
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How different is this from current law? As I understand–but this is not my primary area of expertise–current law requires student loan debtors to pay 10% of their income for 20 years, after which federal loans are forgiven. Also, as I understand, going forward, the only loans are federal loans.
The wisdom or legality of changing the rules for existing debts is less clear to me.
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Did you just make that up? There are plenty of ways to get loans forgiven but they are bound to specific programs. There are certainly private loans still around.
The wisdom or legality of changing the rules for existing debts is less clear to me.
That’s what they did in 2005 when they changed a bunch of bankruptcy laws. I think they should go back.
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NKOTH said:
“But anyway, I do agree that making student loans dischargeable in bankruptcy would be a great step. Bankruptcy has serious costs, so it’s not a get-out-of-jail-free card, but it would allow people who need it to start over…”
That’s quite right. And for anybody reading who isn’t a big personal finance nerd, bankruptcy isn’t nearly as much fun as it sounds. As I understand it, the Chapter 13 version (which is the usual thing for affluent debtors) is a 3-5 year strait jacket.
http://en.wikipedia.org/wiki/Bankruptcy
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I think after a huge credit collapse event, it makes a great deal of sense to roll back the rules to what they were five or ten years ago on that grounds that, whatever the problems were before, we’ve made it worse recently.
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Average American income is $40,000. So, the borrower would pay $40,000 over ten years. Thus, the loan amount (with interest) could be as high as $85,000. A fifty-percent return on investment for the borrower, a fifty-percent loss on investment for the lender. The lender would be the government, I suppose. I don’t see investors lining up to take on guaranteed losses of 50% over 10 years.
I’ll be a wet blanket. No, we can’t afford it. Someone had to say it. There is no right to a college degree, let alone to a succession of graduate degrees.
There are skills our culture needs. Most of them call for hard skills–not sociology. I’d be willing to approve a government plan to provide grants for students with good grades and test scores to study engineering, chemistry, physics, math, or computer science. A plan to educate math and science teachers would be fine, too–rather on the lines of the Armed Services academies. You get a great, challenging education (and yes, people flunk out all the time.) Then, you teach in the public for seven (ten, fifteen) years. If you don’t fulfill the commitment, you must repay the sums invested in your education.
A “free college” plan would only up the ante on the “minimum degree one needs to demonstrate competency.”
Again, we can’t afford it. The Wall Street Journal reported that the Northern Mariana Islands have become the first public pension system to file for bankruptcy protection: http://online.wsj.com/article/SB10001424052702303877604577380171245284562.html?mod=WSJ_article_comments#articleTabs%3Darticle.
Stockton, California is teetering on the brink of bankruptcy: http://www.pbs.org/newshour/bb/business/jan-june12/stockton_03-16.html
PETE SMITH, Stockton Police Department: Let’s say you come home from work, your house has been burglarized, and you find the front door open, but the house is safe. It’s been ransacked. There’s a good chance that you won’t get a uniformed officer at that call. We primarily will respond still to in-progress and violent crimes.
Jefferson County is bankrupt: http://www.businessweek.com/news/2012-04-20/alabama-supreme-court-says-municipalities-can-file-bankruptcy
Jefferson County entered bankruptcy in November after government officials and creditors failed to implement a tentative agreement that would have required the county’s sewer debt, which was largely responsible for the filing, to be cut by about $1 billion.
Pension obligations are overwhelming: http://www.hks.harvard.edu/var/ezp_site/storage/fckeditor/file/pdfs/centers-programs/centers/mrcbg/publications/fwp/MRCBG_FWP_2012_08-Healey_Underfunded.pdf.
In the face of such overbearing financial burdens, there are no easy answers. To fully fund both state and local public pension plans (with liabilities discounted using Treasury yields), every household in the United States would have to be assessed an additional tax of $1,398 a year for 30 years.49 This tax would have to be levied on top of any additional tax revenue generated through economic growth50and is based on the assumption that no public pension reforms are put in place to reduce state pension liabilities.
Making public colleges free would cost, it is estimated, somewhere around $30 billion a year.
What?? Let’s see. At present, 20 million students are enrolled in postsecondary education. http://nces.ed.gov/fastfacts/display.asp?id=98 If only half of them qualified for just the proposed loan forgiveness program (which isn’t close to the average cost of a four year college education), the cost would be about 112 billion per year, once the first wave of debtors claimed the debt forgiveness benefit in ten years.
Is it possible to offer a college education for $1500? (30 billon/20 million).
Of course, if it were free, most late teens would opt for a free public college education. It would be the Ivies, Stanford, MIT, and the public colleges. The cost would not be only $30 billion a year.
We will be doing very well if we avoid conflict between retirees and students. I don’t see how we could achieve that.
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I don’t know why everyone is so rude around here. I asked a question on a topic where I stated I don’t know much. I’m not making anything up. What I know, I know from reading the blog Above the Law. Based on New Kid on the Hallway’s response (which is posted before mine, but wasn’t on the screen when I posted), it appears that what I know applies mostly to professional school debts.
Now that New Kid on the Hallway has enlightened us, can anyone explain the rules for forgiveness of debt incurred at the undergraduate level, and how different Rep. Clarke’s plan would be? I realize casual insult is more fun, but it is less enlightening in the long run.
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“Is it possible to offer a college education for $1500?”
Isn’t that something like one year of community college in CA? And CA is dirt cheap, nationally speaking.
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Agree with Amy P. I think we should allow student loans to be discharged through bankruptcy but not to just forgive student loans after a set amount of time. We shouldn’t deliberately set up moral hazards in public policy. No ones should decide to take out loans on the expectation that the loan will simply go away if they wait long enough.
The issue (as I see it) is that families aren’t really having conversations about the cost of college and how the student/family is going to service the debt they are taking out. I know there are measures being taken to make debt repayment more transparent from the get go and I applaud those measures.
But bankruptcy should be back on the table. There are not lots of people running to bankruptcy because it is the easy solution and the consequences of it do a good job of preventing moral hazard. And personally I do believe lenders and schools should be just as on the hook form bad lending choices as the students who took the loans. If you can offload the risk of lending – you are going to make stupid choices (see mortgage meltdown).
I
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y81,
Your comment started with a question that ignored so much information from the discussions that have occurred over the past couple of weeks, discussions in which you participated. I was not making a casual insult.
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I’d like to know more about New Kid’s info, ’cause I’m not finding anything doing cursory web searches that detail the info she’s citing (not questioning it, just wondering about the details). Which loans does it apply to, for example?
I think that one of the issues is that there are a number of different types of loans people take on that they think of as “student loans” but not all of them are the same. Some of them aren’t even loans to the student (like the parent PLUS loans). And, some of them may not be dischargeable, but also not have forgiveness programs built in (i.e. private loans). Some of them might be discharageable, but were actually taken out by parents (who don’t want to declare bankruptcy).
And, schools have been negligent in explaining these details to the students, making the resources to borrow the money available to the student without explaining all the details (and, students probably have been uninterested in hearing the complicated details).
I think the system is messed up, in incentives/challenges faced by borrowers, lenders, and recipients (i.e. the colleges, who receive the bulk of the money). Of those three, I think the colleges are getting the most gain with the least risk, and that they are the ones who are acting as the middlemen between lenders and borrowers, and that there’s something seriously wrong with the incentives in that circumstance. I also suspect that the borrowers are shouldering most of the risk (along, potentially, with taxpayers), and that too is a balance that needs to be redressed.
Potentially, some of these things need to be retroactively redressed, if the incentives were so misguided as to be fraudulent (and I think they were, for some groups of people and colleges — though not the ones earning multiple graduate degrees). I think the first group I’d want to look at is the veterans, and then potentially others who went to for-profits or other schools with high default rates.
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I also think using the bankruptcy laws to address the problem should be a big part of the solution. Doesn’t bankruptcy already involve income-based repayment plans? As someone else pointed out, there are ways in which the loans are used just like consumer debt (for example, to live on, while in school).
I think the missing part of that solution, though, is the role the colleges play in the process. To some extent, they are more like car salesmen than the person who sold you the hamburger that you paid for with a credit card (who was uninvolved in your acquiring of the debt). I think that part of the solution would be to treat colleges as having a debt repayment burden for the money that is paid directly to them, so that they share in the payment when a student declares bankruptcy.
I do also think that part of the solution has to be to support our public universities, so that tuition does not continue to be supported solely through debt financing.
And, I see no reason for private lenders in this process, apart from their role in providing consumer loans. If they want to offer private student loans that get treated the same as any other consumer debt, they can, but it shouldn’t be treated as special debt.
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All right, well, I think the level of insult here is spiritually damaging, so I won’t comment any more for a while.
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“Doesn’t bankruptcy already involve income-based repayment plans?”
Chapter 13 does.
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Though, to be clear on the bankruptcy issue – most people filing a Chapter 13 bankruptcy will be converted to a Chapter 7 before their payment plan is finished. Chapter 13 is more appealing to many people because it does allow them to pay the debts they owe…but for most of them – they just don’t have the assets or income to be able to maintain the payment schedule.
70% will convert to Chapter 7 through the process, so I don’t think we should sell student loans going through bankruptcy as a way to just re-organize the payment plan. For most, it just won’t.
I think there could be some means testing that one would have to go through in order to declare bankruptcy on your student loans. Off the top of my head – perhaps a ratio of loan amount to income amount? I don’t know exactly.
I also think that students applying for loans should have to not only be shown a payment schedule (including monthly payment and total payment interest included) but also shown a income schedule of entry level positions that graduates are hired for in the student’s expected major…with a breakdown on how that income would look on a monthly basis and a cost ratio showing how the monthly student loan payment relates to the likely job income obtained. If you find out that the starting salary in your likely job pays $1700 a month take-home and the student loans you would be taking out require a minimum payment of $800 a month – I think it would be a heck of a lot clearer that the choice is non sustainable.
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If you find out that the starting salary in your likely job pays $1700 a month take-home and the student loans you would be taking out require a minimum payment of $800 a month
That’s what I’m afraid of. People with debts they can’t pay and can’t escape will, over enough time, are being given an incentive to either remove themselves from the labor force or to remove themselves from the portion of the labor force where you get a W-2.
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“Though, to be clear on the bankruptcy issue – most people filing a Chapter 13 bankruptcy will be converted to a Chapter 7 before their payment plan is finished. Chapter 13 is more appealing to many people because it does allow them to pay the debts they owe…but for most of them – they just don’t have the assets or income to be able to maintain the payment schedule.”
And because they want to keep some of their stuff that they wouldn’t get to keep under a Chapter 7. But if they’d actually had the money to keep the stuff under a Chapter 13, they probably wouldn’t have needed to go into bankruptcy to begin with.
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I don’t think Sasha’s solutions of providing more information for what happens in the future is going to have a huge effect on student behavior. First, many are young (though not all). Which 17 year old thinks about what happens ten years down the road when making these decisions? Only very unusual ones. Second, those who are not young are often desperate. The loan is an alternative to nothing (i.e. no job, no way to pay the rent), sold with the idea that it’s an investment that will make those things possible later on. You might be able to devalue the investment, but they don’t have a better alternative right now.
I think we have to cut people off, in addition to informing them, but also make college more affordable (which to me still means direct support of public institutions, but not all of them). Some of them should close and the money we’d use to support them should go to K-12 & community colleges.
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“That’s what I’m afraid of. People with debts they can’t pay and can’t escape will, over enough time, are being given an incentive to either remove themselves from the labor force or to remove themselves from the portion of the labor force where you get a W-2.”
That’s why lenders need to feel some pain, so that those loans will not be made at all. It needs to matter to both lenders and colleges that this individual cannot realistically pay this loan.
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The bankruptcy solution does need fleshing out, ’cause what’s to prevent people from declaring bankruptcy when they are unemployed, have no assets, and 250K in debt and right out of school. I know that was the reason for changing the rules in the first place, but I think the current solution is flawed (though a significant part of the blame should be placed on the colleges, which get the money but not the risk).
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“I know that was the reason for changing the rules in the first place…”
Actually, I think there was much more concern about people doing stuff like going to medical school, racking up the debt, declaring bankruptcy, and then living it up. I’m not sure how many of those there were in real life, but that’s who lenders were worried about. At least that’s the story I’ve always heard.
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I think that’s part of it, and another part of it was to get a slightly lower interest rate.
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Belated response to bj’s question: I’m sorry, I should have specified that I was talking about government loans only (partly myopia – they’re the only kind I have – and partly the assumption that it’s easier for the government to forgive its own loans than make private lenders forgive their loans, though I have no idea if that’s correct). The info’s here. I was also wrong in that it does apply to undergrad loans (it’s just all my info came by way of law school, so I wasn’t sure off the top of my head where else it applied). But it doesn’t apply to parent PLUS loans.
I think colleges/universities are in a tough position – especially public institutions, because the amount of state aid has been cut ridiculously. Certainly tuition (which is the part of student loans that goes to the schools) doesn’t cover costs (my big-10 grad school stated at the bottom of your tuition bill that tuition covered only 30% of the cost of educating a full-time student). But there is discussion in the context of law schools that easy access to student loans has helped facilitate skyrocketing tuition. (Law school tuition is a slightly different beast from undergrad, of course.)
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Brush it off, y81.
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It occurs to me that with the high mobility of the upper middle class, high subsidies of state colleges may be a tougher sell than they used to be. It’s not clear that the benefit of the subsidy (taxes, services, etc.) is going to stay in the state that provided it.
(The same can apply internationally, as well. My husband collected some very nice fellowships from Canada that the Canadian taxpayer will likely never see a return on, while (more seriously) sub-Saharan African countries have lost a lot on training doctors who emigrate.)
http://www.reuters.com/article/2011/11/25/us-african-doctors-migration-idUSTRE7AO00O20111125
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The obvious solution is to train more doctors in sub-Saharan Africa if they can really train a qualified doctor for $20k to $60k as the article states.
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They can train doctors for $50,000 here, but then many of them leave because they don’t want to work for $20,000 a year here when they could make ten times that in the US.
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Have the western hospital kick by the $50k plus some extra. Zimbabwe could become the new Grenada.
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