Jafar for President: Forgive Student loans

By Daniel Oliver

TheFederalist.com

January 20th 2015

In his State of the Union message on January 20, President Obama will propose that the federal government pay for two years of community college for every student who wants to go. The estimated cost ($3,800 a year each for nine million possible students) is $35 billion a year. The idea is to jack up the number of people who will vote for the Party of Bigger Government.

A few months ago, Sen. Elizabeth Warren (PBG, MA), also interested in jacking up the number of Democratic voters, introduced a bill to allow former students to refinance their loans at the current federal rate (about 4 percent), which in some cases would be half of what they are currently paying.

Obama’s proposal has no merit whatever: it makes more sense for most of the people who might go to a community college to take a route more calculated to achieving employment and mobility.

Warren’s proposal has some merit: mortgages can be refinanced; why not student loans? Millions of Americans would benefit from her proposal—40 millionformer students collectively owe $1.2 trillion. That’s upwards of 40 million people (more recent borrowers have loans with post-QE interest rates) who would be more inclined to vote for the Party of Bigger Government.

Both Obama’s and Warren’s populist proposals are meant to make Republicans look like anti-learning skinflints. Two parties can play the game of giveaway. The Democrats always play it. The Republicans should play it, because if they adopt the right measures, they can drive a stake partway through the heart of liberalism—militant, secular, statist, collectivist, politically correct, (all aboard!) liberalism. What’s not to like? And if Republicans don’t play it? The Party of Bigger Government wins.

Last May, a proposal was made on this site to have the federal government forgive all student loans owed to it and pay off all student loans owed to private lenders—in return for cancelling basically all federal support to higher educational institutions. It’s a crack-a-jack idea.

There are essentially three problems with student loans. Easy-to-get loans encourage many young people (some of whom can’t possibly profit from college) to waste crucial years of their lives at an institution from which they will derive no benefit, partly because the curriculums are useless today and partly because the nature of work is changing. As many people now realize, the primary effect of student loans has been to enable colleges to raise costs, to feed their largely left-wing professoriat.

If federal grants were eliminated, some institutions would collapse, of course, but most of those would be institutions that really don’t provide any value to their students.

Students for whom college makes sense would still be able to get loans?from friends, banks, perhaps companies, and the colleges themselves?as long as they could persuade the lenders (e.g., by having decent SAT scores) that they could truly profit from college.

Despite the proposal’s obvious appeal, a number of people expressed concerns.

First, many critics said, correctly, that it seems unfair to forgive all student loans. Perhaps, but fairness isn’t the only goal, as some critics recognized when they said that it was unjust or immoral to have pushed these loans on unsuspecting young people in the first place. They were seduced by society into borrowing money to prepare for their future, and then given little or no guidance on how to make that preparation worthwhile. It’s not only youth that is wasted on the young.

Some critics even raised the question whether people who make such unwise decisions—incurring massive debt with little thought of how it can be paid off—should be allowed to vote. Interesting question, but not for today.

Second, some critics suggested that forgiving current student loans wouldn’t be fair to those people who had paid off their loans. But that’s not clear. Would we refuse to free a slave simply because his brother had bought his own freedom the week before? The parable in the Bible about the laborers in the vineyard suggests that those students who have paid off their loans got what they bargained for and that their real complaint is that someone else is getting a better deal.

But that’s also true when you pay full price before a sale begins. A good lesson to learn, and the earlier the better, is that life isn’t fair—and most of us should be glad it isn’t.

Some critics suggested that former students should be able discharge their student-loan debts in bankruptcy proceedings. (Before 1978, student loans were dischargeable in bankruptcy just like other consumer loans.) The implication is that student loans are the only kind of debt you can’t get free of.

That’s only partly correct. Anyone who has had his debts discharged in a Chapter 7 bankruptcy proceeding needs to wait eight years before he can file again for the relief bankruptcy affords.

If student loans were dischargeable in bankruptcy, at what point should a debtor be allowed to file? Marie Brunner poisoned that well when, in the 1980s, having just completed her master’s program, she filed for a discharge in bankruptcy within a month of the date the first payment on her loans came due. The court was not sympathetic, and the decision stands—in the way of borrowers who legitimately make hardship claims.

Perhaps a former student could file for bankruptcy only after, say, ten years, by which time he might have acquired some assets. But, assuming his debts exceeded his assets (otherwise bankruptcy wouldn’t be necessary), at that point he would have to liquidate all those acquired assets and pay the proceeds to the lender to get his debt discharged. That would certainly discourage many graduates from acquiring assets, especially if they were not to begin acquiring them until they got near the ten-year mark. Who would start saving $5,000 a year with only three years to go before the date at which he could file to discharge $20,000 in debt? Better to stay judgment-proof until after getting all debts discharged.

One suggestion is to make the colleges and universities the ultimate guarantors of the loans. That’s in line with the thinking—correct—that in time the private sector would produce alternatives to the current government system. Use the market force, Luke.

The key is stopping this business in the future, “this business” being both giving seductive loans to students and making grants to institutions. Given the size of total student debt ($1.2 trillion) and the amount of aid going to institutions of higher learning ($109 billion a year) the country would break even in a decade or so. Of course, we taxpayers are going to pay off some of those loans anyway—the default rate is about 11 percent.

Education is changing, More than one graduate has concluded that he could have learned all knows without going to college. We can hope that in the coming decades more and more high-school graduates, especially bright, aggressive, self-motivated ones, will skip expensive colleges and grad schools and go to professional or training schools instead, or take courses online.

But hope is not a strategy. Massive federal grants to bricks-and-mortar institutions slow down the process of change, at the same time feathering the nests of aging 1960s radical students-turned-professors.

So: we need to stop funding the universities. But how are we going to get the votes in Congress to do that? The answer is, by enlisting the graduates who’ve been had by the current system: by appealing both to their financial interest and to their eleemosynary concern for the students, potential snookerees, who will follow them.

That may not seem very conservative. But Republicans shouldn’t be so squeamish. They’re already in the business of paying off groups—farmers, bankers, insurance companies—but without getting the complementary benefit of defunding liberalism.

Reluctant Republicans should channel their inner devious royal adviser Jafar, and realize that desperate times call for desperate measures.