February 17, 2014

HIGHER EDUCATION BUBBLE UPDATE: Student Loans Are The Worst Way To Fund College.

Individual student loans are anti-insurance. Rather than spread risk, they concentrate it on the individual – who has to bear all of the downsides if something goes wrong. A student who has educational debt is responsible for paying that debt personally. If he cannot find a job, wants to start a family, or encounters hardship, the burden of paying it back remains entirely on the individual rather than spread and mitigated across a larger pool of people.

The current loan system adds to the concentration of this risk. Student loans, unlike other loans, are not dischargeable in bankruptcy. Although they were originally treated similarly to any other borrowed funds, Congress passed legislation first making loans only dischargeable after five years, then seven, and eventually dropping the possibility of discharge altogether. This has led to the various horror stories of retirees still paying off debt and debt collectors hassling cancer patients to pay up before they die. On top of this, private loans now make up nearly 10% of student loan debt. Private loans are notable for having inflexible terms, high rates, co-sign requirements, and evidence of egregious lending practices. In 2012, the Consumer Financial Protection Bureau released a report comparing private student loans to the subprime mortgages at the heart of the recent financial crisis.

Indeed. I’d return the loans to dischargeability, and I’d put colleges on the hook for a percentage when they’re discharged.