Student-Loan Indebtedness — The Non-Problem
By Mark Fowler
In the Democratic presidential primary, there have been several candidates arguing that student-loan indebtedness is a crisis requiring federal intervention.
A brief history is warranted. After World War II, the GI bill allowed returning veterans to finance their education through tuition assistance. Later this was expanded by Pell Grants and federal-loan guarantees to banks to make financial assistance available to low-income students. During the Obama administration, the federal government became the primary lender for student loans, cutting out local banks from the process.
Increased availability of financial assistance coupled with promotion of the notion that college education was a virtual (and the preferred) path to prosperity led to a sharp increase in the demand for college education. Concomitantly, since loan amounts were tied to tuition, college administrators raised tuition knowing that funds would be available to meet tuition. Since 1980 tuition has increased at eight times the rate of inflation.
By 1976, abuse of bankruptcy laws to erase student debt led to legislation forbidding the discharge of student-loan debt in bankruptcy.
Debt is a dangerous thing. Used properly, it can open opportunity for deserving students (and businesses) to adjust to the vicissitudes of life. Used improperly, it can have a devastating effect on one’s economic freedom.
It is argued by people who ought to know better that the loans should be forgiven. This argument is supported by claiming that the heavy load of debt hinders the ability of debtors to buy cars, buy homes, and start families. Hence it is an undue burden warranting relief.
There are several arguments against debt relief except in cases of real hardship. First, it weakens the social fabric. Promises made should be kept as long and as much as possible. When one receives a benefit after having made a promise to pay the money back, then one should be held to that promise unless severe hardship intervenes to make repayment near impossible. Second, if forgiven, the loans don’t just disappear into the ether; they must be paid for by those who received no benefit at all. The individual who chose trade school or the retiree who has finished his career is now being asked to reduce his wealth to pay for those enjoying the benefit of the education. And there should be limits on any one person’s ability to claim a part of the public fisc. Third, non-forgiveness teaches a valuable lesson. When borrowing one should dedicate oneself to minimizing expense and minimizing the burden of repayment. What we are seeing is buyer’s regret. Having purchased an education that seems less valuable now than it did on the front end, individuals are clamoring for a government-backed reconsideration of the loan. If this is allowed, what prevents any number of loans to be reconsidered? Will credit-card loans, car loans and home mortgages next become subject to reconsideration? Will the principle be expanded to small businesses as well as individuals?
Taken as a whole, this is a collision of the adverse effect of government influence. Not everyone needs or will benefit from a college education. Many badly needed jobs do not require a college education. Who can or would discount the need for mechanics, plumbers, electricians, truck drivers, lab technicians, and computer programmers? Politicians proclaiming that college was a preferred path misled many who were not suited for it. Then, by making credit too easily available, they encouraged significant numbers to assume a debt that they cannot repay. College administrators should shoulder their part of the blame by raising tuition and expense to a degree grossly out of proportion to the rate of inflation.
Like most issues, government intervention in the lives of free citizens can and does produce calamitous results. The solution is simple. Hold student debtors to their obligations. Make provision for discharge in bankruptcy for cases of true hardship and tighten loan availability. There will be pain, but it is far better for the moral health of the nation that student debtors be held to their bargain.