Tuesday, June 9, 2015

Bankruptcy, The Key To Solving The Student Loan Debt Crisis

Yesterday's piece on Lee Siegel's narcissistic views about money was by no means unique, as Bre Payton at The Federalist rightly had similarly contemptuous things to say about Siegel's behavior. But I wanted to take a moment and address a remark I see frequently repeated: "popularizing student loan fraud certainly won’t bring about the change he says he’s hoping for", and a section header that reads, "Refusing to Pay Won't Improve Higher Education". I think this is wrong for some very basic reasons.

First, it is largely impossible to discharge student loan debt through normal bankruptcy. This has several unfortunate side effects:
  1. It makes such loans especially attractive to banks, who are all but guaranteed repayment.
  2. It means banks need to do far less due diligence on the loans than other forms of debt.
  3. It adds to the tsunami of money entering universities, providing no incentives to reduce actual costs.
 The straightforward way to deal with college costs is to restore student loans as ordinary debt for bankruptcy purposes. This will have three salutary effects:
  1. It will allow those under crippling levels of debt to escape through established legal means.
  2. It will force banks to perform due diligence on institutions, degree programs, and students prior to writing loans based on prior loss experience. Want to go into six figures of debt to get a degree in puppetry or gender studies? Maybe you need to ask your rich aunt about that.
  3. Finally, as banks turn off the money spigot holding up the college-industrial complex, universities will need to rationalize their degree programs and overhead to fit with the new market realities.
And the last point is the most important one. For all the money roaring into colleges these days, it's unclear what students receive in exchange for exponentially increasing tuition. But we have a pretty good idea about what universities are doing with it, and it's not adding new instructors: mostly, it appears they're engaged in bureaucratic empire building, with administrative staff positions growing more than twice as fast as student populations.
But critics say the unrelenting addition of administrators and professional staffs can’t help but to have driven this steep increase.

At the very least, they say, the continued hiring of nonacademic employees belies university presidents’ insistence that they are doing everything they can to improve efficiency and hold down costs.

“It’s a lie. It’s a lie. It’s a lie,” said Richard Vedder, an economist and director of the Center for College Affordability and Productivity.

“I wouldn’t buy a used car from a university president,” said Vedder. “They’ll say, ‘We’re making moves to cut costs,’ and mention something about energy-efficient lightbulbs, and ignore the new assistant to the assistant to the associate vice provost they just hired.”
This is exactly the sort of  thinking that drives never-ending tuition hikes: with no need to think about costs, colleges don't. Absent people walking away from their product (my second point above), there can be no rationalization; hitting them where it hurts, in their wallet, is the only way this will change.

Please note I am in no way advocating bankruptcy as a desirable end; the sanctity of contracted debt is important. Siegel, particularly, stands out as an entitled mooch. But many young people have amassed huge debts in service to universities that cavalierly ignore the burdens they inflict. For them, and for future generations, it's time to restore some sanity.

Update: Scott Alexander has a fun metaphor for the current situation, likening it to Dutch tulip mania with the added twist of subsidy. He also goes in to review what medical school looks like in Ireland vs. the US; in the US, you have to get through an undergraduate degree of some sort prior to going to medical school, but in Ireland it's treated as a sort of trade school, which anyone may enter upon graduation from high school. The US approach has some awful side effects:
Americans take eight years to become doctors. Irishmen can do it in four, and achieve the same result. Each year of higher education at a good school – let’s say an Ivy, doctors don’t study at Podunk Community College – costs about $50,000. So American medical students are paying an extra $200,000 for…what?

Remember, a modest amount of the current health care crisis is caused by doctors’ crippling level of debt. Socially responsible doctors often consider less lucrative careers helping the needy, right up until the bill comes due from their education and they realize they have to make a lot of money right now. We took one look at that problem and said “You know, let’s make doctors pay an extra $200,000 for no reason.”

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