Bouncing around the town square of public discourse is the issue of student debt. Students are loaded with debt to pay for a university education that will educate them for competing in the global economic marketplace and get them a good job. This debt is not dischargeable in bankruptcy. It must be paid off, and even when you die, it just rolls to your heirs. As the FAFSA videos instruct graduating seniors, you cannot escape it. Student debt is now the $1.5 trillion monster in the economy. There are no proposals offered, neither the Democrats or Republicans offer a solution, and a debt jubilee will not fix the underlying issue. There is a populist solution, and fixing this problem is a populist concern so that people do not enter debt slavery.
This affects everyone. I could link many articles but will paraphrase them. Two thirds of all student debt is held by women. Minorities are loaded with debt without earning a degree. For profit, online schools award more debt than a student needs under the guise of covering living expenses while they learn from home. More student debt is held by those over age 50 than ever before. Student debt loads are inhibiting home purchases and family formation.
Student debt was once dischargeable in bankruptcy. In 1976, the rules changed so that one had to wait five years prior to discharging the debt. This was extended to seven years so to prevent college graduates from graduating and then with cap and gown filing for bankruptcy and making out handsomely. The risk of bankruptcy is an issue with all lending and is associated with the lending rate as part of the risk premium. This is important because of a ‘90s change.
In 1998, President Clinton signed the Higher Education Amendments of 1998. This act was lauded as providing federal funding and subsidization so that interest rates would be lower. Student loans would be more accessible with lower interest rates. Why would rates come down? After the federal changes, students could no longer discharge debt in bankruptcy. This meant repayment was guaranteed. By reducing the bankruptcy risk to near zero, it drove the risk premium to zero, lowering interest rates. Treasury Secretary Robert Rubin supported this. Later on, he left the Clinton administration for Citigroup, which became a giant private lender and servicer for student loans.
This language of loan accessibility is the language of the money corrupted Democrats when facing this issue. They want to lend to everyone to make it accessible so as to avoid the core issue. The core issue is that college has inflated in cost beyond all reasonable growth rates. No one addresses this. A debt jubilee will not change the system because it would not change the behavior of the university system. They now would have a clean slate to lure people in for graduate programs. With a debt jubilee and no other reforms, there is no incentive for universities to reduce or control costs nor consider the marginal student who may not be suited for college. In Nassim Taleb’s words, the colleges have no skin in the game. The federal government merely sends them money with no questions asked.
My proposal, a populist proposal, would have three steps: the first of which is that for all student loans going forward, the loans must be eligible to be discharged in bankruptcy after seven years. In the event that student loans are discharged in bankruptcy, twenty five percent of the principal discharged must be charged back to the university that received the funding. To receive any federal loans, the university must cut costs from 2018 levels by some target like 10% to 20% and not reach 2018 levels again for a set period of years. Read press releases since 2008 and witness how all industries have laid off employees or reduced costs while some state universities see a 1.5% salary increase as belt tightening.
This step is to change future behavior. Universities must have skin in the game. If the university would be charged back a portion of the loans associated with their students, they would need to keep in mind not only who they are accepting in as freshman for cognitive talent but exactly how they are educating them. There was an old joke that Brown University taught basket weaving or other frivolous courses at other schools for athletes and legacy students. Having skin in the game would potentially change how departments are run.
One might ask why the charge back and not merely returning to the seven year discharge rule. There is a reason for it linked to the interest rate and risk premium stated earlier. Right now rates are artificially low because in ’98 student loans became akin to debt slavery. If we allow for them to be discharged, then the interest rates will snap back higher. This matters to the banks and to the GOP PR men that run interference for them. By charging back a portion of the discharged principal back to the university, the loan principal at risk due to discharge of the individual would be reduced. The lenders would be guaranteed to recoup some of the loan no matter what, but now the risk is on the viability of the university.
This is a concern as even some Harvard economists have estimated that up to 50% of all universities could go bankrupt or fold in ten to fifteen years. Costs are skyrocketing, students are considering alternate pathways for life stories, and no one is proposing a radical shift. The only answers are more debt access and ‘free’, which is not free and would only make college more expensive to our system. We need to save universities for the value they can create, but stop using them as a jobs machine for states. Universities are meant for passing on cultural knowledge and cultivating our future thinkers. There is a purpose to them, which our system has lost sight of and needs to return to and soon.
The second step in this process is a debt forgiveness program. I stated that a simple debt jubilee would not fix anything, and this is true, yet now I am proposing debt forgiveness. This is not technically true. Nearly 40% of the student debt is for professional degrees, masters’, PhDs and medical school programs. That debt is not included in this. Over half of all the $1.5 trillion student debt could be forgiven in this program aimed at undergraduate degree debt. It must be paired with the loan discharge revision to work for the future, but this one time debt forgiveness is to help people saddled with this debt now.
Removing all of the debt may set a dangerous precedent, so what if in the name of a Fair Deal for those who did pay back student loans on time, we forgive half of the outstanding undergraduate related debt. In aggregate, this would be just under $500 billion in debt forgiveness. Cutting the debt in half would greater help monthly cash flow for the average graduate with $37,000 in debt. It would allow refinancing to make it so they can shorten the duration if they wanted to while still reducing their monthly payment. This also would improve citizens/ borrower profiles, allowing more people to be able to buy a home and form a family. Consider the number of students who dropped out or stopped their studies who are loaded with debt. They received the debt slavery without the reward.
Some may argue that as $1.5 trillion in assets for the federal government this will never happen. Think again about the asset. Those assets are performing poorly with the number of borrowers in distress and not paying growing. They also are tied to a growing voter bloc that will want them gone out of thin air. A federal asset is the money the government can command. There is a way to wipe this $500-750 billion out without raising income taxes or disturbing the flow of income within the economy. I will write on this in a later essay.
The third change that needs to take place is that employers must be barred from requiring a college degree for a job unless the degree is related to the job. How many millions of jobs are requiring a bachelors’ degree that do not need them? By requiring the degree, the employment situation for the ‘good life’ jobs creates a foundation for demand for a college education. The BA requirement might have been a reaction to the Griggs v. Duke Power Co Supreme Court decision that made employer created tests harder to use to screen applicants without fear of lawsuits. If employers could craft new hire tests that received third party approval, this would allow them to better select for employees rather than just say “BA Required”.
The first and third change affect both the supply and demand for college education. If the colleges have skin in the game, they will tinker with the supply for student acceptances. If individuals do not need a BA for entry level jobs for what they perceive is the good life, the demand for college education will be reduced. There is one other social change that we should consider with this reform. This is a mental change that would require better media messaging.
In our culture, we need to stop pushing all students to get a college education as the right thing to do and the superior life choice. If given the space for a book, it would be easy to show how government programs skew the fact that more education yields more productivity and higher wages. What economists fail to analyze with the decision making process for attending college is that status plays an important part. Not just for the student, but attending college is important for their social circle and family.
This disdain for skilled trades and elevation of the BA as the seal of higher status is causing problems within our economy. There is structural unemployment because some high skilled blue collar jobs need to hire young employees to replace retiring Boomers, but too many 18 year olds are told this work is beneath them. Even if the economic payoffs are similar for attending or not attending college, our entire culture and media infrastructure pushes the college graduate as the high status road while those who do not attend college are considered uneducated townies. Who truly has greater status: the part time barista with an MA who can’t afford a family or the consistently sought after plumber with a family?
Reorienting our economy towards manufacturing and infrastructure investment will also create a demand for more workers with trade skills not requiring a bachelors’ degree. College is not for everyone. There are also other pathways through life that offer equal if not greater satisfaction. Those who do not go to college are not inferior, and our media portrayals of ‘townies’ vs ‘students’ could use a calibration to reinforce this. Townies shouldn’t be considered inferior nor the bad guys. After all, unlike the students, they are not the debt slaves.
This reform is needed because the current system is unsustainable with minor adjustments and never-ending enabling of the university system. A shock and assignment of accountability must take place or else we will see the overturning of the entire university system in a far more violent manner. An enterprising lawyer could dream up a class action lawsuit for students to go back at the universities. That day does not need to come if we make the adjustments now and in a win-win-win.