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With total student debt in our nation topping $1.3 trillion, there is considerable pressure from a variety of constituencies to allow borrowers to renege on their loan obligations through bankruptcy. Unlike mortgages, credit card balances and auto loans, student loans are exempt from bankruptcy proceedings.
President Obama is considering making student loans eligible for bankruptcy because the federal government is the lender or guarantor on 90 percent of them. This policy proposal has been met with skepticism — and not just among private companies that also issue student loans such as Wells Fargo, Sallie Mae and Discover Financial. Many other questions also have been raised about what would happen to the cost of student loans if such a policy is adopted.
According to the Federal Reserve, the average debt load for a student is less than $30,000 – a figure considered to be manageable by most economists. More stories, however, about $100,000-plus student debt dominate the news cycle. What is often not reported is that many of these extraordinary debts include substantial borrowing for graduate studies and/or significantly prolonged undergraduate college experiences that may include semesters abroad.
In his own words, President Obama’s plan is designed to “make sure that across the board, more and more young people can afford to go to college, and afterward, aren’t so burdened with debt that they can’t do anything else.”
At first blush, this is a reasonable contention.
A contradiction of values?
On the other hand, do we want to suggest that young people should consider bankruptcy as part of their financial planning for college? Such an outcome would seem to be juxtaposed to the virtues of responsibility and citizenship that we hope college graduates possess.
There are already a number of programs that lower monthly payments and/or ultimately forgive student debt. The William D. Ford Federal Direct Loan Program was established in 2007 so students can reduce their debt. Students who pursue careers that are deemed to be in the public interest and have relatively low salaries, such as nursing and teaching, can have a portion of their loan debt forgiven. Others who have shown good faith by having already made a number of payments may be able to have the remaining portion of their student loan reduced. These programs seem to make a relatively good compromise between easing repayment schedules based on income and/or societal needs, and not incentivizing irresponsible financial behavior.
Allowing for bankruptcy options for the 40 million Americans with student debt would deprive the government of badly needed revenue. Furthermore, interest rates on all student loans and most consumer debt would increase if even a quarter of those 40 million people defaulted on their student loans.
The value of a college education
What is the answer? Student loan debt differs from other forms of consumer indebtedness, such as auto loans and credit cards, because it represents an investment. The rate of return on a college education is significant, often outpacing the return investors realize from stocks and bonds.
Generally, college graduates earn 84 percent or about $1 million more over their lifespan than high school graduates, according to Georgetown University’s Center on Education and the Workforce. Of course, the rate of return on a college education is dependent upon the major students select and their occupational choices. Unlike consumer debt, however, borrowing to go to college represents an investment in not only the individual but society as well. College graduates earn more money, pay more in taxes and tend to be more involved in their communities. They give more to charities and volunteer more often than those who did not attend college. In other words, borrowing for college can make good sense for the student and good sense for the graduate’s community and the country as well.
The real problem with college debt is that it must be paid at a time when a young person’s earnings are at their lowest point. Extending repayment schedules and giving financial consideration to graduates who pursue occupations that are deemed to be beneficial to society makes eminently more sense than does incentivizing bankruptcy.