Debt decisions

Student loans have become the summer’s hot regulatory issue, and we’ll hear a lot more about them between now and November. With roughly $1.2 trillion in outstanding student loan debt, and a lousy job market, student loan defaults look like a disaster waiting to happen. But the real reason for most of the recent attention seems to be Democrats’ conclusion they can score points with the student loan reform issue in the upcoming election.

The best evidence that politics is steering the ship is a proposal by Sen. Elizabeth Warren, D-Mass., who has been sounding the alarm on student loan debt since her days as a law professor. Under Warren’s bill, which fell a few votes short in the Senate last month, borrowers could use government money to refinance their loans down to 3.86 percent (from 7 or 8 percent in many cases). Where would the money come from? A new tax on the wealthy. This turned the vote into pointless “political theater,” as Slate.com put it; the tax forced Republicans to vote no, and let Democrats claim “the GOP sided with the rich and against students.”

Much of the recent discussion also assumes that student loan borrowers are all the same. But there actually are two very different types. My law students fall into the first category. Many of them graduate from law school with mind-boggling amounts of debt—well over $100,000. They often feel constrained to take the highest-paying job they can get, so that they can begin paying off their debt. More importantly for the economic recovery, most of them also will not be financially secure enough to buy houses any time soon.

These are serious constraints, but students who have degrees from high-quality universities are far less likely to default than the second category of borrowers: students who attended more precarious colleges and in many cases never actually got a degree. These students, many of whom attend for-profit or online colleges, generally have much less student debt. But their job prospects are often bleak.

The Warren bill isn’t a great solution for either set of concerns. A lower interest rate—and slightly lower bills—wouldn’t enable my students to buy houses, so it wouldn’t help the housing recovery or give the students a great deal of relief in the short run. And lower interest rates would do almost nothing for borrowers who don’t have either a degree or a stable job. The bottom line: serious costs and very limited benefits.

A more effective reform would start by rethinking the government’s role in the student loan market. The government currently is the lender for a large majority of all student loans. I don’t think the government should get out of the student loan business altogether. After all, the education made possible by student loans benefits all of us, not just the borrowers themselves (and would benefit us even more if some of the corrosive tendencies in American universities were reformed). A well-educated citizenry is a “public good” like safe neighborhoods or clean water, and expanding access to higher education is a much better response to income inequality than a tax on the wealthy.

But the government shouldn’t be deciding whether to lend to a particular borrower or what the interest rate should be. These aren’t decisions that government employees are good at making. An economist friend of mine recently suggested a clever alternative: The government could agree to lend $1 for every $1 committed to a borrower by a private lender, perhaps at a slightly lower interest rate. Private lenders would make the initial lending decision, and the government would help out from there.

You probably won’t hear much about options like this in the run-up to the November elections, but perhaps lawmakers will be interested in considering real reform after the dust finally settles.