NYT Supports Private Student Loan Bankruptcy Reform, Protects Financialized Dept. of ED

After trashing for-profit universities, the New York Times editorial, “Relief for Student Debtors” adds this:

It had long been the case that federally backed student loans were protected during bankruptcy proceedings. That is reasonable, since those loans were backed by taxpayer dollars and flexibly structured so that borrowers could receive deferment in tough times and resume payments when their finances improved. The country has a compelling interest in making it as difficult as possible for student borrowers to elude payment for federal loans.

Sort of. Congress extended the “undue hardship” exception on federal student loans into perpetuity in 1998. Before then, the law required people to wait seven years before discharging federal student loans. Even then, the exception has always been a solution in search of a problem. Default rates in the late 1970s never reached 1% when it was first enacted. Contrary to the Times’ belief, the bankruptcy restrictions obscure the fact that the government has a far more compelling interest in (a) ensuring consumers have purchasing power (economic growth), and (b) using its money towards productive purposes, which is the inherent problem to government lending because it is by definition taking on a greater risk than the private sector is willing to. Otherwise, normal banks would be making the loans themselves.

As a result of this “crowding-out per se,” the government tries to protect its inherently high-risk investment by changing the bankruptcy code, but that makes borrowers debt zombies, which runs contrary to the purpose of increasing their productivity through education. So the government sways the opposite direction, creating hardship deferments and income-based repayment programs, but then it starts losing more money on the loans while universities live high on the hog until at some point, tuition increases so high that the Direct Lending Program could be replaced with a cheaper, more effective national university system. The New York Times Editorial Board does not understand the Hegelian ouroborous Congress spawned by financializing the Department of Education. I suspect it will take a few more years until it and other mainstream media do.

In other news…

I eschewed the news on Hurricane Irene and favored the National Hurricane Service’s reports.  The whole time the government predicted it’d be a severe tropical storm by the time it hit NYC, so I wasn’t terribly worried–mostly annoyed that Bloomberg shut down the subway system. On Sunday I strolled around and found a bar near my home that had this to say:

Now tropical cyclones talk to me through drinking establishments.

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3 Responses

  1. As I have told you more than once in the past, Matt, it is far worse, even than you portray, with the Department of Education not just “protecting its investment”. Rather, The Department is making $1.22 for every dollar it pays out on defaulted FFELP loans. So (even after assessing reasonable collection costs of 5%) it is fair to say that ED is making, not losing money on defaults.

    Sigh…it may take another couple of years for the advocates and experts to catch up, too.

    • Alan, I’m sure readers would love to know more about what you’re talking about, except your website says “Account Suspended.”

      • My apologies for that. It is back up now (studentloanjustice dot org). I would post a link to the research backing this up, but to avoid your filter, will only urge interested readers to see the headline “Government profiting on defaults”, and follow the first link in the article. Comments on this analysis is appreciated.

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