08 Dec A conservative argument for bankruptcy reform – Part 2 – Make student loans dischargeable
In Part 1, I discussed the necessity of cramdown to marshal rational behavior in the marketplace.
Student loans are a rare exception to the bankruptcy discharge, meaning that only in the extreme of circumstances will a debtor be able to escape that financial obligation. At first blush, this might seem fair, but the result of this exception is a major reason why the United States is no longer king of the hill when it comes to higher education.
There has been a flood of investment dollars into the student loan industry over the last 20 years or so as a direct result of making student loans non-dischargeable. The investor’s capital is more secure, as there is a greater probability of repayment. The desire to maximize the student loan market has frequently resulted in abuse and fraud by lenders and universities.
This disproportional investment in the student loan sector has had the opposite effect that one would imagine. According to The National Center for Public Policy and Higher Education in it’s annual “Measuring Up” Report, the cost of obtaining a college degree has grown at a pace 4 times faster than the rate of inflation.
This chart graphically illustrates the meteoric climb in the cost of higher education in this country:
The sad result is that, in the last 10 years, average tuition has more than doubled, and the number of students taking out loans has doubled.
And what are we getting for this increased cost? The Center concludes:
The United States’ world leadership in college access has eroded steadily, as reflected in the international comparisons of the proportion of 18- to 24-year-olds enrolled in college. In college completion, which has never been a strength of American higher education, the U.S. ranks 15th among 29 countries compared. The U.S. adult population ages 35 and older still ranks among the world leaders in the percentage who have college degrees reflecting the educational progress of earlier times. Among 25- to 34-year-olds, however, the U.S. population has slipped to 10th in the percentage who have an associate degree or higher. This relative erosion of our national “educational capital” reflects the lack of significant improvement in the rates of college participation and completion in recent years.
I submit that making student loans non-dischargeable was the “tipping point” that started the slide in higher education in this country. If student loans had been dischargeable, the money investors put into that industry would have been proportional to other industries. With a smaller pool of cash for tuition, you can bet universities would not have been able to raise the cost of education disproportionally to the rest of the economy.
The education crisis, like the housing crisis, can and should be solved through bankruptcy reform. Student loan lenders should no longer be protected from bankruptcy discharge.
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