Do It For the Kids: A Student Loan Solution

Mish

Discussion of the plight of student loan debt has been in the news several times lately. A reader challenged me for a solution.

Rogue Executive Actions

Biden is already bending to the wishes of Elizabeth Warren and Bernie Sanders to want to forgive student loans.

On Monday, Senate Minority Leader Chuck Schumer announced Biden ‘Considering’ Forgiving $50,000 in Student Loan Debt via Executive Action.

Schumer held a press conference alongside Democratic Congressmen-elect Ritchie Torres, Mondaire Jones and Jamaal Bowman of New York, during which the group announced they have “come to the conclusion” that Biden can “forgive $50,000 of debt the first day he becomes president.”

“You don’t need Congress, all you need is the flick of a pen and President-elect Biden — then President Biden — can make this happen,” Schumer said.

Asked if Biden will have the executive authority to forgive the debt, the New York Senator said the president-elect is researching that and “I believe when he does his research, he will find that he does.”

Huge Moral Hazard

I discussed the moral hazard of student loan cancellation in Another Good Reason for No Student Loan Bailout

Debt discharge is a huge moral hazard that encourages more overpaying for useless degrees.

It will do nothing to address the cost of higher education.

We need more competition, more accredited schools, more alternatives, and less public union graft.

Forgiving debt fosters less competition and more graft and does nothing to fix any fundamental issues.

Six-Point Solution

  1. End collective bargaining of all public unions. That is the source of numerous problems.
  2. Cut coaches and administrator salaries
  3. Cut pensions
  4. Add competition via more alternative education programs. The teachers' unions fight this idea, and it's certainly not for the kids.
  5. Pass national bankruptcy reform. Let cities, municipalities, and local government bodies go bankrupt. That is the first step needed for pension reform. Some states, including Illinois, do not allow municipal bankruptcies.
  6. Modify the bankruptcy reform act of 2005 to include a means test based on employment and job salaries to allow some students to discharge debt in bankruptcies.

Do it For the Kids

The pension crisis, bankruptcy reform, escalating administrator and coach salaries, and collective bargaining all need to be fixed. Until they are, bailouts are nothing but a big moral hazard.

Do something for the kids instead of the teachers, administrators, and pension funds. 

Related Articles 

  1. Illinois Is Ground Zero for the Pension Crisis
  2. Illinois is Insolvent: State Requests a Pension Bailout From Congress
  3. Democrats, Here's Your Chance to Get Rid of Bad Police

Article number 3 discusses the role of public unions in this mess. Even Franklin D. Roosevelt understood the inherent problems and massive conflicts of interest in public unions. 

A good first step to fixing the education problem would be to end collective bargaining of public unions, bankruptcy reform, and pension reform.

How about doing something for the kids instead of the teachers, unions, administrators, and pension fund operators?

Mish

Comments (95)
No. 1-30
RunnrDan
RunnrDan

Allowing student athletes to negotiate contracts for playing would help divert revenue streams away from the university coffers to their rightful owners (the student athlete) resulting in the shrinking of university administration bloat.

Doug78
Doug78

Why talk about this after the election? The ones coming in are all against what you are proposing. Illinois will get bailed out because they played ball. Same for the public unions and so forth. Charted schools which offer choice by the way are on the teachers union hit list and the coming administration will oblige. It's too late to influence the election.

Sechel
Sechel

Thank you. Unfortunately We're not on the same page. I think free market breaks down whe you have lenders throwing money at 17 year olds that lack the discipline and maturity to price out an education. I agree on point #6. I'd literally void the reform act which was no reform. Bankruptcy judges should be allowe to void or renegotiate debt. I'm fine with trade schools but there's a lot of fraud in for-profit education.

KidHorn
KidHorn

How can people not be able to pay back their debts? There are jobs available to everyone provided they have a good work ethic and good work history. I think the problem has as much to do with laziness than poor decision making. I suspect if we brought back debtors prison, that would go a long way in making a lot of student debt current.

Jefeweiss
Jefeweiss

They should just make student loans interest free or very low interest. They could sell them in some sort of bundles to the Fed, like mortgages. Then people have to pay them back, but they don't accrue interest over time. Voila, no moral hazard because they have to be paid back, but people don't end up paying back multiples of what they borrowed in interest and penalties.

shamrock
shamrock

Nick saban has a $9m salary. That's $230 per undergrad. However, the football program still makes a profit of $48m. So without football tuition would need to increase by $1,200. I don't understand the problem.

AnotherJoe
AnotherJoe

My counterpoints:

  1. This does not explain cost in private colleges so 1/2 a point
  2. Cut coaches and administrator salaries: May be. Don't sports programs generate money? (I don't know)
  3. Cut pensions: Cap pensions...
  4. I'm in favor to trade schools for sure
  5. %100
  6. Modify the bankruptcy reform act of 2005 to include a means test based on employment and job salaries to allow some students to discharge debt in bankruptcies.: Why means test and not all?

I would add:
Drop all interest of current debt to 0. Why is anyone paying %8 for debt guaranty by the Federal Government?
No loans for private school education (only state)

Six000mileyear
Six000mileyear

The solution already exists. The GI Bill. And after paying off that degree, those people will have work experience to make to make them employable in the private sector.

MISH has posted charts showing delinquency and default rates for various categories of debt. If I remember correctly, credit card default rates were about 2% and student debt was over 10%. So student loans could be declined based on certain risk factors (high school graduation rank, alignment of college degree with aptitude, choice of college).

Doug78
Doug78

What about preventing the bank or issuer from selling off the loans to other parties. They have to keep it on their balance sheets. Additionally oblige them to administer the loans themselves.

njbr
njbr

Meanwhile in "Warp Speed" today....

Some major problems are already emerging in the initial rollout of the COVID-19 vaccine, and the federal government is not providing any good answers.

The early warning signs:

At least eleven states are reporting cuts in their initial allocations of doses.

One governor is reporting that the total number of doses projected to be available nationwide has been cut by four million monthly.

The vaccine maker reports it is not having production problems and says it has doses in warehouses, but is awaiting direction from the federal government on where to send them.

The combination of no production problems plus doses sitting in warehouses suggests some issue with the federal government’s oversight of the distribution of the vaccine.

Louis Winthorpe III
Louis Winthorpe III

I think the solution is simply to treat student loans as any other loans and allow them to be discharged in bankruptcy, with equal terms.

Part of the issue is how hard it is to discharge student loans in bankruptcy in the first place, on much more stringent terms.

Anda
Anda

For sure much debt is predatory, but moral hazard doesn't just start after college and all contracts were voluntary. So to put it another way, those who are for public funding/forgiveness of that debt, they are saying to those who did not take the highflyer pre-paid option but instead chose to go out and work, they are saying but in much more unfriendly terms to them "losers". They are saying "we were so privileged to get funding, and we are so privileged as to afterwards just write off its cost". Some say that with the excuse that it was unfair to be privileged, as if there was no choice or as if they were more important than that. Access to higher education is not a right, no-one owes it to another, it is a pursuit taken by vocation or for reward, and neither of those exempts a person from whatever responsibilities they sign up to along the way.

Anda
Anda

If students feel wronged, they should figure out how or why and then sue, not just expect someone to come along offering to write off their debt for their vote, because that is one way politics becomes corrupted, and so a country itself.

Realist
Realist

Point 3: Why stop at cutting pensions in the education area? Social Security is a much bigger problem than this. It should be immediately cut to salvage it for future generations.

Captain Ahab
Captain Ahab

I beg to differ with Mish's six-point plan for student loans, and economic problems in general.
Only one change is required to fix problems of student loans, unqualified/unmotivated students going to college, low high-school standards, low quality degrees, poor/lazy faculty, administrative waste, etc. Keep in mind that after 30 years as a professor, I have seen all of the above, and all are getting worse.
The university system must be accountable for its failures. The solution: each university receiving student loan funds must guarantee repayment of those loans.
Offer low quality degrees, hire low quality faculty, accept low quality students, have low standards for graduation--graduates will not get/keep jobs. The university is soon bankrupted by repaying loans.

Captain Ahab
Captain Ahab

As an employer, do I want to hire an U of Alabama graduate who has been to every football game, partied afterwards, and has a C average; or a graduate who is physically fit, intellectually curious, with an A average?
Perhaps it is time to rethink college sports.

Sechel
Sechel

So if your parents are rich you get access to great schools but bit if your parents are poor. This is how a class structure permeates society

Jackula
Jackula

While we are at it lets get rid of public sector unions, best way to make the police more manageable.

Flappingeagle
Flappingeagle

The way to solve the pension crisis is for the states, cities, and counties who are in trouble to put an income tax on the pension. A flat 10% thatgoes back into the pension fund might do it.

JG1170
JG1170

I agree that for at least the last 15-17 years the cost has grown unfairly fast. If Biden goes ahead and "forgives" Student Loan debt, then there is only ONE fair way to do it in my opinion. I'd be ok with taking all the people who recently graduated (or about to) and shaving off 1/3 of their debt, INCLUDING giving a tax or cash credit those who had it but already paid it down. Heck, we'd also have to find a way to give credits for those who worked their way through or somehow saved up to go. Then I'd make a sliding forgiveness/credit scale going back 15 or 17 years and where the 2020 debtors get the 33% cut and the 2003 debtors get 1% or zero. But then what happens to next year's graduates, and the next?

amigator
amigator

Stop printing money and it will essentially fix itself. Will take a little might even have to have a dollar reset. using a quote from another site.

THE BANKS MUST BE RESTRAINED, AND THE FINANCIAL SYSTEM REFORMED, WITH BALANCE RESTORED TO THE ECONOMY, BEFORE THERE CAN BE ANY SUSTAINABLE RECOVERY.

Casual_Observer
Casual_Observer

Ending derivatives would go a long way towards resetting the economy back to repricing of all things based on supply amd.demand. We have had a casino economy since derivatives took off in a big way in 80s and 90s.

tillemetry
tillemetry

I think it would be great if everyone making comments here would add a line at the bottom of each of their statements concerning how much of their wealth was inherited. It would also be great to talk about how much influence their parents had on the schools they chose. Basically, how much impact did your parents have on your decisions at that point in your life? What financial contributions did your parents make to your college educations? I don't want to hear from the one self-sufficient person, and please don't call me names. Just discuss...

mistaburr
mistaburr

Disagree about a means test for calculating how much student debt could be discharged in bankruptcy. There is nothing sacred about student debt. Lenders never should've been granted the ability to make non-dischargeable, non-collateralized loans to 18-year-olds. This fiasco was easily predicted (yes, I said at the time and ever since). There never would've been this student loan bubble without the 2005 bankruptcy bill. That bill once again legalized usury. Those who claim "well I paid off my loan" also very likely had the option of having it discharged if they went through the bankruptcy process, which is no small thing. The rules have since been changed.

Rhet
Rhet

Mish,

What are you thoughts on clawbacks? IIRC Yale School of Drama has one of the worst default rates. It's fantastically expensive and almost no one earns enough to pay back their loans. In that case, when the student defaults, that tuition is clawed back from Yale.

Schools need skin in the game just as much as students and lenders. They should be on the hook for offering programs that offer no realistic way of paying back their cost.

jfs
jfs

My two cents:

  1. Remove all government funding of tuition, including grants and loans.

  2. Require that loans be paid back with 10% of gross income until loan is paid off or until death. Thus, there is no allowance for bankruptcy, but lenders can be assured that people cannot just avoid paying (unless of course they work under the table, which is already an issue to some degree with respect to income taxes and wage garnishments).

  3. For people who are already indebted with student loans, they can have a grandfather clause where they pay at their current rate or they can pay at the new rate of 10% gross income.

amalagoli
amalagoli

I fail to see the connection between public unions bargaining power and the cost of education, a lot of which is delivered by provate colleges. If anything else, this proves that private is not always better.

So much rigidity for student loans, but much less Indignation for corporate and wall st bailouts that overshadow student loans bailouts.

Let’s be practical. While it is true that too many people go to college with no intention of really learning anything, it is absurd that the cost of education in the US is so astronomical. If you let all these students default, it will create another massive poverty problem that will have to be dealt with anyway.

So while the moral case against student loans bailouts may sound reasonable, pragmatism must prevail.

Just Olga
Just Olga

How about reducing the cost of schooling by going to a good state school instead of the private out of state big name? One's being indeed exceptional (aptitude plus hard work) should open the doors to graduate schools of high reputation (many times accompanied by scholarship), but aiming for the high quality undergraduate program that you can not afford, before proving yourself (if it does not come with a scholarship) is a gambler's attitude.

Greenmountain
Greenmountain

Years ago I worked in one of the largest welfare offices in the country. A very wise man ran the agency. I was totally ignorant intern assigned to him for one year. He pointed out that in a country of millions we are trying to design a system that works for all and will hopefully help a few. He pointed to the one youth who would gain so much from a guitar. But in our system either everyone gets a guitar or none. And so none and we of course fail to reach that one child. And thus with education. The current system fails so many, but is designed for the masses or so we hope.


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