Good Debt, or Bad Creditors

Debb Thorne at Credit Slips has an interesting (and probably controversial) post.  She questions whether homeownership under prevailing mortgage terms, and college education tied to crippling student loans have made the American dreams of home ownership and a college education unrealistic.

[W]ith recent reports of corruption in certain segments of the student loan industry, the stories of educated Americans owing more student loan debt than they can ever hope to repay, the historically high rates of home foreclosures, and the meltdown of the mortgage lending industry, I’m not so convinced that either one of these types of debts is at all good. In fact, I think that Americans should be encouraged to rethink (even reject?) these taken-for-granted pillars of the American dream.

But what’s changed? Why have these good debts gone bad? I would argue that the primary culprit exists at the social institutional level. Namely, when regulations on the credit industry were loosened in the late-1970s, it marked the beginning of the end of these two types of good debt. What had at one time been appreciated and understood as necessarily-affordable social goods (homeownership and an educated populace are positive things, right?) devolved into breeding grounds for get-rich-quick schemes and gluttenous profitability–and the big losers were, and continue to be, average American families.

I have a fundamental problem with letting greedy, manipulative and dishonest elements change anyone’s dream, but I think that a reality check may be in order.  One hopes that market forces will correct the problem, but I have little confidence in that, either.  (Remember the savings and loan debacle?  Same tune, different day.)  And some changes in the laws, particularly in the bankruptcy laws, are needed.  Changing the bankruptcy law to allow restructuring of non-traditional mortgage terms has been a topic of discussion here and elsewhere.  In my opinion, just as urgent is the need to reform the bankruptcy code’s provisions dealing with student loans.  Student loans have been protected from bankruptcy in large part because of government subsidies.  That justification does not apply to private student loans at above-market interest rates.  Are such loans available because they cannot be discharged in bankruptcy?  Maybe, but no such protection is available for credit card debts, and most of us seem able to get those.  And, bottom line, does it make sense to protect the availability of student loans (and mortgages, for that matter) in amounts that consumers can’t afford to repay.