Whose Debt is Student Debt?

A few years ago a colleague at The Pell Institute—Marshall Grigsby—predicted that the mountain of educational debt accumulated by college students to finance their higher educations would someday come crashing down. The economic lives of young adults fresh out of college were too fragile to withstand some unforeseen future storm.

Now that I am a witness (and victim) of the current seizure of credit markets in the U.S. and around the world, Marshall’s comment has been churning in my mind. Today (September 29, 2008) the House of Representatives will vote to authorize the Secretary of the Treasury to spend up to $700 billion to buy bad debt from banks and other credit holders to restore some liquidity to domestic (and international) credit markets.

This act is profoundly troubling to almost everyone. It reeks of a taxpayer bailout of the unbridled greed that has plagued the U.S. economy since 1980. The moral hazard problem is that there is no penalty for risky investment practices if taxpayers assume bad debts from speculators who gambled and lost (or won). Without the moral hazard penalty excessive greed and unwarranted risk are freed to plunder and steal wherever people can be duped into dubious investment schemes—of which there are now many. In the end future generations of taxpayers will be paying off China for our current irresponsibility.

What lesson does this offer to the student loan industry? The federal government is neck deep in guarantee obligations to student loan lenders and holders. If students default on their federally guaranteed student loans the U.S. Government (yes, We the People) will pick up the tab. Then we will deny the student a bankruptcy outlet and assign the defaulted paper to multiple collection agencies to harass the student loan borrower until death to pay off his/her loan balance, plus interest. Death is the only way out of this economic slavery.

If the country is headed for recession now then student loan repayment default rates should be rising. The more serious the recession the more students will default and the greater the cost of the taxpayer bailout. An economic depression could produce the collapse of the deck of cards on which the educational loan industry is built. Then, as we have been doing since 1980, we will not tax ourselves to pay off the lender’s debt but rather increase our borrowing from China and defer to future generations final reconciliation.

The problem as I see it is that the intermediaries (colleges and universities) escape with their profits from student loans without any responsibility for seeing that educational loans are repaid to lenders (increasingly the federal government under direct lending). To protect We the People from paying off such debts, requiring colleges to co-sign with student borrowers for educational loans used to pay institutional charges would greatly reduce taxpayer default obligations. Institutions would have a powerful incentive to graduate those they admit (the U.S. graduation rate is among the worst in the western world), and if students got into default trouble with lenders then institutions would share in the recovery effort. Taxpayers should not have to repay defaulted student loans—such responsibilities should be shared between the students who took them out and the institutions that received these funds.