April 2, 2015

HIGHER EDUCATION BUBBLE UPDATE: Stop Giving Everyone A Student Loan:

People get taken by scams every day, often with the help of government money. Should Fannie Mae forgive the mortgages of people if the buyer misrepresented the condition of the house? Should the Small Business Administration forgive the debt of some guy who pledged his house to back a no-hope franchise operation? For that matter, what about people who go to a big, public party school and major in sports marketing or tourism? The taxpayer cannot be made responsible for every unwise decision every individual makes, even if the government finances it.

That’s not to say these students shouldn’t get relief. They should. Happily, we already have a system for dealing with people who are burdened with excess debt: the bankruptcy system. The government should change the law to make it easier to bankrupt student loans.

But at the same time, this case points to an issue that I’ve highlighted before: the need for better underwriting in student loans. Simply allowing students to borrow large amounts of money and then bankrupt it is a recipe for big government losses. We should allow people to bankrupt student loans, but the corollary to that is that we need to be more careful about the loans we make in the first place.

Right now the system indiscriminately lends to any marginally well-equipped institution that can claim to be teaching anyone any skill, even if that skill isn’t going to increase a student’s ability to repay their loan. It’s no wonder that institutions are setting up lots of useless programs to collect those tuition checks; the real wonder is that there aren’t more stories like these.

The best thing we could do to bring educational costs under control would be to eliminate, or at least cap, student loans.

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