07 November 2011

Why Not Default


Seriously, what’s so difficult about allowing student loans to be discharged in bankruptcy?

Today, President Obama is effectively giving college students and their parents his middle finger. Whereas Jobs’ prank was harmless and symbolic, the President’s plan to bail out student loans will derail the entrepreneurial dreams and financial security of countless young people. [Ed. - this claim is utter bulls**t. Bailing out student loans will increase their financial security because they will no longer be slaves to the banks.  And, with less debt, they can actually become entrepreneurs.]
By executive order, the President’s unconstitutional “We Can’t Wait - Pay As You Earn” plan modifies the existing Income-Based Repayment Plan so that, effective in 2012, graduates may cap their loan payments at 10 percent instead of 15 percent of their discretionary income. Anything remaining after 25 years (formerly 20 years) becomes fundamentally the taxpayers’ responsibility. And, if a student wants to become a public servant (i.e. work for George Soros) his loan will be forgiven after just 10 years.

Obviously, Obama is playing for political points with this plan, presumably to mollify the OWSers, so I understand outrage for that reason.  But what I don’t understand is how anyone thinks that student loans weren’t already the taxpayers’ responsibility.  The government guaranteed student loans a long time ago, which is one of the reasons there’s a college bubble—private lenders face virtually no risk on the loans.  In fact, the government guarantee of repayment is why default was taken off the table as an option:  the government didn’t want taxpayers to take it in the shorts.

Neo-con bomb-lobbing aside, Obama’s plan is pretty terrible.  It shouldn’t wreck the economy (at least no more than seeding a college bubble would), and it’s better than a jubilee for the loans, but there is still a much better solution available:  the federal government should stop guaranteeing student loans and allow them  to be discharged in bankruptcy.  This way, college student wannabes won’t be as inclined to pursue worthless degrees and banks won’t be as inclined to fund the pursuit of worthless degrees.  You don’t need bailouts, you don’t need special debt laws, all you need is the ability to discharge student debt during bankruptcy.  Problem solved.

2 comments:

  1. "the federal government should stop guaranteeing student loans and allow them to be discharged in bankruptcy. This way, college student wannabes won’t be as inclined to pursue worthless degrees and banks won’t be as inclined to fund the pursuit of worthless degrees."

    But don't you know that this will effectively deny poor and lower-middle class kids the pursuit of a college education and access to a higher standard of living? If the government didn't guarantee these loans regardless of credit history, then how would kids who need college degrees to access better paying jobs ever fund their educations? /sarc

    The government should get out of this business altogether. College degrees in "humanities" or "xyz-studies" of any kind are generally useless. The college bubble is also partly the fault of government regulation on hiring practices: no more tests for new hires because they might be discriminatory; instead, the bar to pass will be "college degree of any kind" in order to be a secretary or whatever. I'm surprised by the kind of jobs that employers require candidates to hold at least a BA in order to be interviewed.

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  2. "The college bubble is also partly the fault of government regulation on hiring practices: no more tests for new hires because they might be discriminatory; instead, the bar to pass will be "college degree of any kind" in order to be a secretary or whatever."

    @Amy- I'm pretty sure that this is borne out by signaling theory. If not, it should be, especially in light of how relatively bad minorities perform in college.

    At any rate, it's interesting to see how one government intervention begets another. Even more interesting is how virtually every intervention tends to be counterproductive to its stated aim.

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