I've been giving some thought to the problem of the education bubble.
I start with the assumption that everyone recognizes that there is a bubble in higher education. There has been a clearly unsustainable expansion in the size, amenities and expense associated with a bachelors degree over the last decade or so. Alongside there has been an explosion in student debt.
Unlike just about every other form of debt (except those associated with child support), student debt cannot be expunged during bankruptcy. This situation exists to predict lenders from the graduate freeloader scenario. In this scenario, a student attends as much school as possible and pays for it all (including living expenses, semesters abroad, etc.) with loans. The graduate freeloader loads up as much debt as possible and then declares bankruptcy immediately upon graduation. The student walks away with a great experience, a valuable degree and a mere five years of moderate financial inconvenience.
Nobody likes the concept of the graduate freeloader.
Leaving behind for a moment the rate of incidence of the graduate freeloader problem (I have no data one way or the other), let's assume it is a real problem and one that we really need to prevent.
One way that lenders protect themselves is through collateral. If the borrower defaults on the loan, the lender collects the collateral. This is how mortgages work, and we generally presume that the burden of due diligence for this sort of loan rests with the lenders. It is the lender's obligation to ensure that the collateral backing the loan (on a risk adjusted basis) is sufficient to cover the loan in the event of default. This is part of why none of us had much sympathy for the mortgage industry when their preposterous lending activities during the real estate bubble led to serious financial problems for the banks. It was the duty of the banks and the mortgage brokers to vet the quality of the loans, not really the duty of the borrows to do that for them.
I propose that a similar arrangement should exist for student loans. I believe that borrowers should have an extra bankruptcy chapter... call it "Chapter 16" or something. Chapter 16 would be the most complete form of bankruptcy... after liquidation of all other assets to satisfy senior creditors, the filer would also have to surrender his/her credentials as well. Although this is only metaphorical as collateral from the liquidation perspective of the lender, it would serve a very similar role from the perspective of the borrower.
Chapter 16 would address the graduate freeloader problem too, as long as banks weren't extending credit to students for things other than the pursuit of their degree or for superfluous nonsense degrees. One could argue "But what 21 year old kid will care if they can't pay their loan and they have to give up their degree in comparative medieval literature, especially after spending 3 semesters in Spain on the bank's dollar?"
I think that's a great argument, and exactly the one that the bank should be considering before it extends the 18 year old kid (who will become that 21 year old kid) $140,000 to do that.
Andre
I start with the assumption that everyone recognizes that there is a bubble in higher education. There has been a clearly unsustainable expansion in the size, amenities and expense associated with a bachelors degree over the last decade or so. Alongside there has been an explosion in student debt.
Unlike just about every other form of debt (except those associated with child support), student debt cannot be expunged during bankruptcy. This situation exists to predict lenders from the graduate freeloader scenario. In this scenario, a student attends as much school as possible and pays for it all (including living expenses, semesters abroad, etc.) with loans. The graduate freeloader loads up as much debt as possible and then declares bankruptcy immediately upon graduation. The student walks away with a great experience, a valuable degree and a mere five years of moderate financial inconvenience.
Nobody likes the concept of the graduate freeloader.
Leaving behind for a moment the rate of incidence of the graduate freeloader problem (I have no data one way or the other), let's assume it is a real problem and one that we really need to prevent.
One way that lenders protect themselves is through collateral. If the borrower defaults on the loan, the lender collects the collateral. This is how mortgages work, and we generally presume that the burden of due diligence for this sort of loan rests with the lenders. It is the lender's obligation to ensure that the collateral backing the loan (on a risk adjusted basis) is sufficient to cover the loan in the event of default. This is part of why none of us had much sympathy for the mortgage industry when their preposterous lending activities during the real estate bubble led to serious financial problems for the banks. It was the duty of the banks and the mortgage brokers to vet the quality of the loans, not really the duty of the borrows to do that for them.
I propose that a similar arrangement should exist for student loans. I believe that borrowers should have an extra bankruptcy chapter... call it "Chapter 16" or something. Chapter 16 would be the most complete form of bankruptcy... after liquidation of all other assets to satisfy senior creditors, the filer would also have to surrender his/her credentials as well. Although this is only metaphorical as collateral from the liquidation perspective of the lender, it would serve a very similar role from the perspective of the borrower.
Chapter 16 would address the graduate freeloader problem too, as long as banks weren't extending credit to students for things other than the pursuit of their degree or for superfluous nonsense degrees. One could argue "But what 21 year old kid will care if they can't pay their loan and they have to give up their degree in comparative medieval literature, especially after spending 3 semesters in Spain on the bank's dollar?"
I think that's a great argument, and exactly the one that the bank should be considering before it extends the 18 year old kid (who will become that 21 year old kid) $140,000 to do that.
Andre
