Let them go Bankrupt–the federal student loan guarantee isn’t all it’s cracked up to be.

Let them go Bankrupt–the federal student loan guarantee isn’t all it’s cracked up to be.–4gh., b12-1

Most student loans in the  United States are guaranteed by the federal government. The main difference between private loans and the guaranteed loans IS that the former usually come with a higher interest rate: Students generally don’t seek these out until they cannot access guaranteed loans any longer. However, neither type can normally be discharged via  bankruptcy.’

‘Recently the Department of Education proposed making it easier to discharge private student debt bankruptcy While the knee-jerk reaction is that doing so will be disadvantageous for students who need to borrow money, that’s not necessarily true. Doing such a thing—especially if we expanded it to all student loans-would drive up interest rates. But it would not be a bad outcome if students were forced to make better college choices and economize on how much they borrow. It would likely also to increase graduation rates and reduce d the total amount of student debt.

Because the student cannot discharge student loan debt via bankruptcy, neither the lender nor the college need worry about default.  Admitting (or lending to) students at an institution where they are unlikely to succeed is a regular occurrence that goes well beyond the suspect trade schools and  for-profit colleges. Tuition does not entirely cover expenses at most schools— endowment funds and grants from the state and federal government also  defray costs at most colleges—but it’s irrelevant: Additional students, at the margin, can be quite lucrative for a well-managed university.

Colleges have a high fixed cost but the variable costs are much lower. Some colleges take it even further. Both of the state universities at which I once taught offered a special three-semester program for high-risk students whose test scores and high school performance suggested that their potential to succeed in a university setting was low. The classes were taught not by Ph.D.s but by graduate students or retired high school teachers, paid well below what any professor made. That made sense because the curriculum was far from being college-level rigor: The three semesters of math culminated in algebra I, something their classmates outside of their program had probably completed in 8th or 9th grade. The students in these special programs lived together, ate meals together, and studied together. remaining perpetually apart from the rest of the student population. And within a semester or two of joining the rest of the student body they failed out together as well: At each school only a handful of students from the special program managed to graduate.

Their education was funded mainly with a combination of Pell grants and guaranteed student loans that more than covered the modest additional costs of admitting this cohort. While the colleges boasted that these programs were a manifestation of their concern for children from marginal neighborhoods and weak high schools. they were also cash cows .

If we made student debt dischargeable in bankruptcy like nearly all other debt  then the banks that make these loans would do their best to lend to people who have a reasonable chance at succeeding at the educational institution they choose. The data support this: Private student loans, which are easier to discharge in bankruptcy than government student loans, have lower default rates.

The fact that student loans guaranteed by bankruptcy protection than private loans makes them superior to those issued by private lenders, because they charge the same interest rate to all borrowers, which reduces potential  inequality. It’s a position that is mystifying. The bankruptcy exclusion for most Student debt is bad policy and leads to lousy outcomes.  The cumulative Student debt exceeds $1 trillion.

source-weekly standard (2/22/20160, ike brannon., elizabeth warren, adm levitin


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