Debt Jubilee? Start With Student Loans

There is one concrete answer being offered to the anguish of the "99%":  a debt jubilee, where some or all of the outstanding debt is forgiven.  It's in the bible and it helps overburdened debtors, say supporters; shouldn't conservatives and liberals both be ready to jump on board?

The attractions are obvious.  But so are many of the downsides (which is why, as I understand it, orthodox communities that still follow the tradition have mostly come up with elaborate ways to get around it.)  In an op-ed for the New York Times, Martin Hutchinson and Robert Cyran run through some of the issues:

To start, writing off debts would not necessarily increase economic growth. Every liability is also an asset, so while a dollar that is no longer required for debt repayment might add some cents to consumer spending, it is also a dollar cut out of a bank's capital or of an investor's net worth -- subtracting from resources and confidence.

And write-offs big enough to change consumer behavior would probably be big enough to destabilize banks. The Federal Reserve or the government would need to help, presumably by injecting newly printed money as capital. Such government control is usually inefficient, and abundant printing of money increases the risk of uncontrolled inflation, which has its own way of making people feel poorer.

The issue of moral hazard also cannot be ignored. Much of the excess debt was incurred through irresponsible mortgage refinancing, which peaked in 2006 at $322 billion, representing 2.4 percent of G.D.P. The reckless use of houses as A.T.M.'s was a major factor in decapitalizing and destabilizing the American economy. Forgiving such debts will teach the wrong lesson: borrow in haste, repent never.

Finally, investors would rightly see a jubilee as an attack on property rights. That runs the risk of throwing markets into disarray and discouraging foreign investors from buying assets in the United States. Risk premiums on both debt and equity capital would increase.

With that in mind, let me propose a modification that might at least alleviate some of the problems experienced by the 99%: allow students to discharge their student loans in bankruptcy (at least the ones guaranteed by the government, and private loans made before the rules were changed to make private loans un-bankruptable).  There is really very little excuse for completely exempting student loan debt from bankruptcy.  Bankruptcy is supposed to be the recognition that a person does not and will not have the resources to pay their debts--so why shouldn't the government have to stand in line along with all the other creditors?

I am fully aware of what this would mean: government lending costs would go up, the program might well become unaffordable, and if private loans were included (as they should be, at least for new loans), the private loan market might well disappear altogether for all but the most lucrative specialties.  The reason that the bankruptcy exception was written in the first place was that the loans used to have an extraordinarily high default rate.

But I'm not sure this would be a bad thing.  By allowing students to shift forward the additional income that their degree will earn them, student loans have allowed universities to capture a huge portion of that future income stream--which really hurts those for whom that stream doesn't materialize.  Moreover, it allows students to make the sort of stupid choices that most 19-year-olds will make if they're allowed.  I don't have a lot of patience for university administrators claiming that they just can't possibly charge less than $25,000 for 15 hours a week worth of classes, but they do have one point:  they build expensive new facilities and load on the services because students demand them, and threaten to go elsewhere if they can't get them.  Colleges look ever-more like four year resorts with a sideline in academic research.

If students actually had to earn the money to pay for that world-class fitness center, the 2,000 different clubs, and the off-campus apartment with the pizza parties, there would be a lot less of those things.  And while I like both world class fitness centers, and apartments, they're not the sort of thing that should be funded with borrowed money.  If the degree caused pain now rather than pain later, they might also think harder about whether what they were studying was likely to deliver a solid return on that investment.  I'm not faulting the students--the future is a pretty hazy concept when you're eighteen.  I'm just arguing that it's not necessarily helping to enable them.

But wouldn't that cut people off from the priceless gift of college?

I don't think so.  When my parents were in college, it was possible to work your way through. At most colleges, for most students, that's no longer a realistic possibility.  College costs have inflated much faster than the costs of everything else, and if it weren't for student loans, I'm skeptical that this would have happened.

Moreover, I take seriously the arguments that no everyone who currently goes to college should be there.  Calm down--I'm not arguing for some society of morlocks and eloi where many are born to labor in the dark without end.  I do think that there's a lot of fairly ridiculous credentialism out there--employers require college degrees because they can, not because it actually helps you do your job better.  If fewer people went to college, those jobs would still be available; they just wouldn't require college degrees.

There are also a lot of people who go to college because they don't know what else to do, find out they hate it, and drop out.  Those people end up burdened with loan repayments for value they didn't receive.  Whenever I suggest that not everyone should go to college, I am met with cries of classism and snobbery.  But here's the thing: I love studying in a way that most people just don't.  That's not a moral judgement: it doesn't mean that I am better than people who do not particularly care for classrooms.  Which is why I see no reason to insist that everyone should be avid . . . indeed, practically forced . . . to spend another four years in classrooms.

My grandparents had maybe ten books in their house, and I never saw either of them read one.  They were wonderful people (my grandmother still is).  They had rich, full lives that were exactly as valuable as the lives of a Harvard physicist.   My grandfather was an extremely successful businessman and a pillar of the community who was deeply respected by everyone who ever met him. I don't think we need to create a world in which everyone like my grandparents "gets" to spend four years seeking a degree in history; I want a world in which you can skip college and still be a successful businessman and a pillar of your community.  It's still possible, but it's a lot harder than it used to be.

On net, I'm sure some people would be worse off if student loans were harder to get--but I'd guess that many more people would be better off if their government, and private creditors, and universities, had not enabled them to make some very, very expensive bad decisions.  The answer to this problem is not to further socialize the college-industrial complex; it's to demand that it justify its worth to its customers up front, for cash on the barrelhead.

Plus if we stopped the broad general subsidy for student loans, we could put that money into merit scholarships or scholarships for the neediest students, rather than yet another plan for the middle class to get rich by picking its own pockets.

Meanwhile, making student loans bankruptable would offer immediate relief to those who are trapped under crushing debt burdens from which they now can't escape.  It might not give a huge immediate boost to the economy.  But at least it would give some of those people some hope that they might one day get ahead.