Skip to comments.The College Loan Defaults Are Coming--Here's What to Do
Posted on 03/31/2012 6:07:50 PM PDT by SeekAndFind
No modern-day Paul Revere is taking a midnight ride to warn about this, but the defaults are coming. Many are already here. They are coming from student loans given to the wrong students for the wrong reasons. The portfolio of federally guaranteed student loans passed the one trillion dollar mark in early 2012, and it continues to grow. The portfolio consists not only of loans for students from low-income families currently in college but also of hundreds of millions of dollars of education loans taken out by students who graduated from college or quit before graduating that have not been fully repaid. Such loans were extended either by the Department of Education directly or by financial institutions like Sallie Mae and banks and guaranteed by the United States Treasury. The total size of this loan portfolio exceeds the total credit card debt of the American population.
Former students will eventually default on a considerable portion of these loans--a reasonable estimate is 40 per cent--or die before paying them off. This means that student debt is likely to be a permanent drain on taxpayers, as defaults add to the ballooning federal debt. Defaulters suffer too; they need not fear debtor's prisons, which no longer exist, but their credit standings will be ruined for years. Even some graduates of professional schools cannot find jobs in the professions they borrowed large amounts of money to train for -- and cannot repay their loans. Nine graduates of New York Law School accused their alma mater of misleading them about their postgraduate employment prospects and sued. Melvin L. Schweitzer, a New York Supreme Court judge, dismissed their lawsuit. While expressing some sympathy for the students' plight, Justice Schweitzer said the suit had no merit and was essentially a case of caveat emptor -- let the buyer of a legal education beware.
Unsustainable and Imprudent Loans
This pessimistic prognosis for student loans assumes that that the existing student loan program has become unsustainable, as the sub-prime mortgage-lending program was unsustainable, because of imprudent risks. Sub-prime mortgages were at least based on property, albeit overvalued property; student loans are based on nothing more tangible than the earning prospects of students after completing their educations. The student-loan risks were imprudent because of at least two aspects of a trillion-dollar misunderstanding:
True, it is not possible to predict precisely which students are likely to repay their student loans and how quickly they can do it. But ignoring the likelihood of students being able to repay their loans invites similar problems to those attributable--at least partly--to bankers who did not require applicants for mortgage loans to make down payments, have good credit histories, and produce evidence of earnings from employment. What evidence is there that bankers are capable of distinguishing students likely to pay up from students likely to default? The most compelling evidence is the experience of banks. The history of banking over many centuries - and the profitably of most banks - attests to the ability of loan officers to distinguish good risks from bad ones.
Here's what the Department of Education does now: it gives Direct Loans to every college student who demonstrates financial need, without examining evidence of academic ability and other criteria of credit-worthiness. From the liberal standpoint, this policy provides crucial educational opportunities to young people from low-income families. Liberals are willing to have taxpayers pay for the higher default rate in exchange for the increased educational opportunities for children from low-income families.
Why Are Taxpayers Ultimately Responsible?
This policy position recalls the confusion of grants and loans. Children from low-income families already receive Pell grants as well as other need-based scholarships that do not require evidence of good credit ratings or superior academic performance. In 2009-2010, Congress appropriated $25.3 billion for Pell grants for 7.74 million American students. True, the maximum grant was only $5,350 per year and the average grant $3,646, not enough for the rising tuition rates at most colleges and universities. Keep in mind though that these are taxpayer gifts that do not have to be repaid, and the Pell grant program has been an expensive drain on the budget that continues to grow. For 2010-2011 Congress appropriated $32.9 billion for 8.87 million American students; the average grant had risen to $4,115 and the maximum grant to $5,550.
Congress established a loan program in addition to the grant program because it seemed politically untenable to provide grants large enough to cover the educational expenses of the millions of students who wanted to attend college, regardless of scholastic preparation or serious interest in education. The logic of loans was to give students some responsibility for the cost of their post-secondary educations. It was only partial responsibility, however, because federal guarantees of repayment of the loans made taxpayers ultimately responsible.
The three possible approaches to the student loan problem are as follows:
- Turn all the loans into grants so that taxpayers rather than students are responsible for repayment.
- Continue to provide student loans to all students who demonstrate financial need, regardless of whether many default - thus allowing similar disadvantages both to students and taxpayers as happened with sub-prime mortgages.
- Insert a risk-assessment component into all future student loans that includes credit-worthiness and past academic performance, in order to maximize the likelihood of loan repayment and minimize defaults that add to the national debt.
Possibility 1 is unlikely to attract the support of the voting public and therefore of Congress or even of President Obama in view of current concerns with budget deficits and the overhang of the large national debt. Possibility 2 is almost as bad; the trillion dollars of student debt that has already accumulated will grow and the defaults will increase. That leaves Possibility 3 as America's only chance for keeping student debt under control. The best argument against it is that some students who would ultimately pay back their loans will not receive them because they don't appear to be good risks to the screeners and, on the other hand, that some students who look like good risks to the screeners ultimately default. In short, the human beings who assess the risks of would be student-borrowers, being fallible human beings, make imperfect judgments. Of course, in a decentralized system of loan allocation, students denied a loan in one bank might receive it in another. Although mistakes will be made, the question is: Is a student loan system that attempts to control the risk of default better than one that gives loans promiscuously to all college applicants? Reasonable voters would say that it is.
Moreover, attempting to control the risk of student defaults has an important advantage, as I argued at length in the final chapter of my book, The Lowering of Higher Education in America: Dangling the prospect of getting needed student loans before students and their parents constitutes an incentive for college students and would-be college students to behave more responsibly. They will be more likely to pay attention in class and do assigned reading, less likely to spend long weekends drunk or on "recreational" drugs, and less likely to accumulate a bad credit rating by maxing out their limits on several credit cards on balances that they cannot pay. In short, a side effect of the risk-assessment approach to student loans is to nudge the student cultures of college campuses in the direction of making responsible adult behavior more attractive - even respectable. Well, why not?
Jackson Toby is professor of sociology emeritus at Rutgers University and an adjunct scholar at the American Enterprise Institute. The paperback edition of his book, The Lowering of Higher Education in America: Why Student Loans Should Be Based on Credit Worthiness, will be published in April 2012 by Transaction Publishers.
Higher “education” costs too much, it’s a ripoff to support the fat cat lifestyles of academia.
Just another constituency that will be “bought” before November, 2012, with “OBAMA MONEY”, but forcing taxpayers, again, to pay for the benefits to others who never intended to pay their debts in the first place, and to his banking supporters who know they will not be at risk (backed up by the U.S. Taxpayer, once again).
He’s gotta be one lonely guy surrounded by libs at Rutgers.
So the Fed has to buy more treasuries, no biggie they are already buying 60% of them.
Then they collect the interest, take their cut, and send the remainder back to the U.S. Treasury.
Yeah sure... "students, parents, and lawmakers".
As always, working taxpayers will get the bill.
There is no default student loans. You have to pay them.
Exactly. They are non-dischargeable in bankruptcy except for cases of undue hardship (which is an impossible standard for about 99.9999% of borrowers). Labeling a non-dischargeable debt as “in default” is merely a matter of nomenclature, it does not change the reality that the loans are still enforceable obligations.
All this chatter about having to do “something” about student loan debt recently smells like a prelude to a giveaway attempt by Obama. But, to change dischargeability, you need to change the Bankruptcy Code, and that means both houses of the Congress along with the President. So, not going to happen this year. Certainly not in the ensuing 4 years.
the author is not a conservative. All his solutions still involve massive govt support of higher education of unknown quality.
The govt should not do any loand for higher education. That would cause demand to drop and prices to drop immediately. The whole higher education system needs to change. No longer can we afford to have massive physical plants sitting empty most of the time and high paid professors doing little work. Modern technology has moved far beyond our current system and only a competitive..free market solution will reform it.
The drumbeat of Dictator Baby-Doc Barack continues to grow louder - regulate - control - destroy - Regulate - control - destroy - REgulate - control - destroy - REGulate - control - destroy - REGU
I smell an EO eliminating debt for "Holder's people" who look like Obaama's son, but not for whitey.