Ed Driscoll

OWS: The Government-Inflated College Loan Bubble Bursts

As Kenneth Anderson of the Volokh Conspiracy noted in the post we linked to a couple of hours ago, “It’s not populism versus the bankers so much as internecine warfare between two tiers of elites:”

The upper tier is still doing pretty well.  But the lower tier of the New Class — the machine by which universities trained young people to become minor regulators and then delivered them into white collar positions on the basis of credentials in history, political science, literature, ethnic and women’s studies — with or without the benefit of law school — has broken down.  The supply is uninterrupted, but the demand has dried up.  The agony of the students getting dumped at the far end of the supply chain is in large part the OWS.  As Above the Law points out, here is “John,” who got out of undergrad, spent a year unemployed and living at home, and is now apparently at University of Vermont law school, with its top ranked environmental law program — John wants to work at a “nonprofit.”

Which was the topic of Glenn Reynolds’ New York Post column yesterday on the bursting of the college loan bubble. As the Professor writes, we’re told that “student loan debt is ‘good debt,’ because a college degree guarantees more earnings:”

Tell it to the Occupy Wall Street protesters, many of whom note that they’re deep in debt for fancy degrees that didn’t get them jobs.

The problem is, “college” isn’t an undifferentiated product. Companies can’t hire enough mechanical engineers, but there’s no bidding war for majors in Fine Arts or Women’s Studies, degrees that cost just as much, but deliver a lot less in terms of employment. In an economically rational market, it would be harder to borrow money to finance fields of study that were unlikely to produce enough income to pay back the loans. But since the federal government subsidizes everything — and makes student loans un-dischargeable in bankruptcy — there’s no incentive for lenders to care, and even less incentive for colleges and universities to care. They get their money up front, after all — just like the people who wrote the subprime loans that fueled the housing crisis.

For serious student-loan reform, we’re going to have to look well beyond the Obama proposal. We need something that aligns incentives with reality. Here’s my proposal:

I think we should return to the days when student loans were dischargeable in bankruptcy, starting five years after graduation. This will allow graduates who are unable to pay to get out from under what is otherwise a potential lifetime of debt-slavery. If you buy a house to flip, and wind up losing your shirt, we let you go bankrupt, take a credit-rating hit, and scrub the debt away. Why should graduates be forbidden from doing the same? The five-year delay means that you can’t use immediate post-graduation poverty as an excuse (as some medical students used to do), but still provides an out.

But the real incentive-alignment part is this: Put the institutions who issued the degrees on the hook for the money they received. Making them eat the entire loan balance would probably bankrupt a lot of colleges (though that should tell us something about the problem right there), but sticking them with even a small fraction — say, 10% or 15% — would be enough to inspire a much greater degree of concern for how much debt students take on while in school, and for how likely they are to find gainful employment after graduation.

One way or another, the higher education bubble is going to deflate. Better that it should do so without crushing the students it was supposed to benefit — or the taxpayer.

And more one related OWS item to conclude this post. Over the weekend, I wrote about the kabuki-like nature of the Occupy Wall Street protests, where plenty of nostalgic CEOs and businessman get to “Recreate ’68” vicariously through the protestors. But it’s not just Bobos in Paradise CEOs; Zombie explores  “The 99%: Official list of Occupy Wall Street’s supporters, sponsors and sympathizers.”