Free Marketers on Student Lending: Protect the Banks
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Last month, legislation was introduced in both the House and Senate that would bring private student loans under chapter 7 bankruptcy protection. When the bankruptcy code was amended in 2005, private student loans became virtually unforgivable. The bill would return the law to its pre-2005 language, and allow private student debt to be excused in bankruptcy like all other private debt. If passed, it would ensure that if someone files for bankruptcy, they are actually allowed to start over, and not subject to continued and crushing student loan payments.
This bill is particularly pertinent because the percentage of adults defaulting on the student loans is rising; while the job market has seen improvements, it is still close to 10 percent and expected to remain high for years. Even without the financial crisis, it makes little sense to punish people more for taking out loans to get an education than to get a car they can’t afford or to pay off a gambling debt.
Nonetheless, an op-ed in Forbes on Tuesday disagreed: “First, the possibility of student loans being dismissed in bankruptcy increases the risk for lenders…This will almost certainly lead to higher interest rates to reflect the heightened market risk of providing student loans without any collateral.”
In economic terms, this makes sense. Conversely, right now banks are making loans they know must be paid back, but rather than having low interest rates, those rates have been rising and often extort huge sums of money from people already struggling with debt. Yes, the risk is higher, but bankruptcy is rare and banks will still make money off those loans – just not a killing. Banks will try to raise rates no matter the risk and students often suffer the most for this.
But the article’s main point is the old argument that government interference is bad in general: “The simplest is to get the government out of the student loan business altogether, and let the market handle it…These loans are a huge liability for the public that can easily be avoided by getting the government out of the student loan market.” But equating student loans to other poor uses of taxpayers’ money misses the whole point. Education is a public good. It should be more affordable, and making sure education is available has been a goal and priority of government for years because going to college is good for both the individual and society.
Lastly, the author makes the inane suggestion that colleges themselves should be responsible to banks if students from their schools default on their loans. Such a program would end up taking money away from colleges, making education less available, affordable, and of lesser quality. It would not have the intended effect, unless the goal is to worsen education. Lastly, many students take out loans to attend public universities, meaning that those schools paying for loans would be the government and taxpayer paying the loans, which is what the author wanted to avoid in the first place.
There are a few lessons to take from an article like this. The first is that no amount of financial crisis or reform will impress upon free market ideologues the need to regulate the financial industry and protect consumers. Second, and more importantly, those who argue against this because of increased hardship on banks simply do not value education as a right of the individual or as a public good. The author may study college affordability at a think tank here in D.C., but he doesn’t see funding an education as fundamentally different from buying a car. These aren’t the values we need in shaping education policy.
Pema Levy is a staff writer for Campus Progress.
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