A Simple Solution to the Burden of Educational Loans
5/2/22
I have very mixed feelings about the potential policy that would forgive loan obligations for educational loans. On one hand, I fully appreciate that debt imposes a burden on borrowers that postpones their ability to start building wealth; but on the other hand, the decision to take on debt in the first place is one that is freely entered into; and as a rule, I tend to think that such contracts should be enforceable. Special cases, however, deserve special consideration.
Most obviously, borrowers who were seduced into taking out loans to attend schools that promised but failed to deliver high-paying jobs for their graduates deserve some measure of relief. Arguably, many of these students should have been more circumspect about signing up with these hucksters, but recognizing that these borrowers have been victimized seems appropriate to me — particularly in cases where the educational institutions have been found to have been guilty of fraudulent behavior. The Department of Education, in fact, can claim some measure of credit in allowing for loan forgiveness in at least some such situations.
I’m less sympathetic to those who incurred substantial loans in connection with accredited colleges and universities. Whether these institutions are worth their costs may vary on a case-by-case basis; but the judgment is, or should be, left to the prospective student. In the vast majority of cases, students have alternatives. Presumably, the willingness to take on debt to pursue a particular credential reflects a cost/benefit analysis, which, to some extent, is speculation. In effect, the borrower who contracts with a school is betting that the credential will be worth the cost. Like any speculation, if you’re right you win, but if you’re wrong you lose. It’s not clear to me why the bet in connection with securing a diploma should be considered any differently from bets relating to any other purpose.
On a personal level, my first real exposure to the possibility of incurring debt came as I was considering my choice of college. At the time, I had the option of going to a public university, where I’d be able to graduate without having to take on any debt. Alternatively, I could have chosen to go elsewhere, in which case, in all likelihood I would have had to take out school loans; and I’d be saddled with the repayment obligations.
Back then, I had little difficulty making that decision. I applied to UCONN, the flagship state university in Connecticut, where I grew up. I was lucky. I got a quality education; and, as expected, I got out of school unencumbered with debt. I admit that I had had some insecurities about the standing of my university relative to, say, the Ivy League or other, prestigious private schools; but I wasn’t ready to bet that the other degrees that I might have qualified for would have delivered a more generous payoff than my UCONN degree. This personal backstory may somewhat explain why the idea of near-universal loan forgiveness doesn’t sit right with me. I don’t see why those who made different choices than I should now have those choices subsidized, retroactively.
My bias notwithstanding, the high rate of defaults on educational loans, by itself, suggests that we have a problem; and some measures to address this condition are warranted. By way of comparison, the Department of Education estimates that about 10–20 percent of all student loans are currently in default. At the same time, the latest S&P/Experian Consumer Credit Composite Index recorded a default rate of only 0.46 percent. This disparity suggests something unsettling about the burden of educational debt relative to other forms of debt. It seems to me, however, that the appropriate remedy is not to forgive debt universally, but rather to structure educational loans to allow for a longer payback period with lower monthly payment requirements, with the added provision of forgiveness upon death or disability. (This obligation is not one that we should want to pass on from one generation to the next.) If federal educational loans restructure in this way, the private loan market will likely follow. It’s not rocket science; it’s just economics.
