Radical Solutions Required to Solve Student Debt Crisis

Since the recession began in 2008, the idea that college education is a golden ticket to prosperity has become a bit tarnished. More college graduates than ever find themselves carrying an immense amount of student debt, while at the same time trying to land a job in a very unfriendly job market. Peter Coy, writing for Bloomberg Business Week, is now looking at how, over the past several decades, the perception that college debt is good debt has permeated society — and how in the past 5 years that notion has slowly begun to fall apart.

Although the rumblings about a student debt bubble were common as early as 2006, it wasn’t until 2010, when the amount of combined student loan debt surpassed credit card debt in the country for the first time, that the clamor grew deafening. Since then, it seems, the problem of college graduates carrying loans that they might be unable to ever pay off is seldom off the front pages.

In 2011, the total student load debt was larger than the total amount of auto loans. In March of this year, it surpassed $1 trillion for the first time according to the report by the Consumer Financial Protection Bureau.

It grew by $300 billion from the third quarter of 2008 even as other forms of debt shrank by $1.6 trillion, according to a separate tabulation by the Federal Reserve Bank of New York. In a press briefing at the White House in April, Education Secretary Arne Duncan said, “Obviously if you have no debt that’s maybe the best situation, but this is not bad debt to have. In fact, it’s very good debt to have.”

It seems like everyday realities for current college students and those who have recently graduated belie Duncan’s optimism. Even if the idea that carrying student loan debt isn’t in itself a bad thing rings true, that surely doesn’t go for any amount of debt. After a certain point, like all the other loans that must be repaid, it becomes a burden rather than an investment in future success.

There are several proposed solutions to the student loan crisis, but as Coy points out, there is bound to be at least one entrenched interest group opposing each one. One approach that would have the most impact would be to allow bankruptcy court judges to discharge student loans. This was possible until restrictions were gradually introduced starting in 1976, and now this kind of debt can only be discharged when the filer can prove “undue hardship.”

Allowing this kind of bankruptcy discharge of government student loans would no doubt prove to be a difficulty for schools. However, according to Alex Pollock of the American Enterprise Institute, that is a feature rather than a bug. Avoidance of this kind of pain might make colleges think twice about pushing their students into these kinds of loans — and just might make administrators reconsider their eagerness to raise tuition.

Some of the nation’s wealthiest universities—and some smaller schools such as North Carolina’s Davidson College—have eased the burden on students by replacing all loans with grants in financial-aid packages. That’s noble, but not a realistic solution for all of higher education. “Most colleges are not awash in money. It would be very difficult to dial back the competitive game” of doling out aid to maximize revenue, says Douglas White, a business consultant and higher-education expert in Richmond, Va.

09 24, 2012
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