Give Credit Where Due

Rachel M. Zahorsky, “Law School Closings and Changes to Student Loan Bankruptcy Laws May Be Ahead, Says Former Dean,” ABA Journal.

Former law school dean at Nebraska and Houston, Nancy Rapoport, favors bankruptcy reform for student debtors. This is important because law professors are usually more interested in discussing the need for reforming legal education for new students than addressing the debt problems of recent (and not-so-recent) graduates, to say nothing of current students. I’m not sure if this is because they think the issue is simple—that everyone should realize the debt should be dischargeable or if they think this isn’t their problem. The ABA, for its part, frequently proclaims “IBR for everyone,” and hopes that the government doesn’t notice how much law schools cost it.

A few thoughts:

(1)  I haven’t done comprehensive research, but there have been some cases in which people were able to discharge their student loans despite the “undue hardship” exception, contrary to the single technical case Rapoport mentions. That doesn’t mean it’s readily doable, but it’s either making a gamble on filing an adversary proceeding or a scorched earth strategy of sequential Chapter 13 filings. The tougher call is advocating for bankruptcy reform for those who are up to their eyeballs in debt but are still able to pay on it without serious reduction in their living standards. I suppose we’re fortunate we don’t have to worry about that? Not much of a benefit if you ask me.

(2)  I like how she puts it, “Even if [the graduate employment statistics] were true at the time, they aren’t now.” Sure, the statistics probably pass internal and external validity tests, but are they relevant to what applicants want to know? I’d say no.

(3)  I like how the first day of the American Bankruptcy Institute’s meeting on reforming Chapter 11 included Congresspeople sounding alarms on student debt. How many corporations have education debt?

(4)  Rapoport believes that only a few schools at the bottom of the hierarchy will close. I think she bases this on what information the applicants get, which suggests that many schools that should close won’t.

(5)  This passage: “You have to balance that against- This is the government’s money for the most part; they really like getting paid back, and they don’t want to create a moral hazard where people- What used to happen is you’d go to medical school and you’d get $400,000 of debt, you file for Chapter 7 and you walk off clean. They don’t want that anymore, but there has to be a happy medium, and I keep thinking of the show Northern Exposure, where the doctors go into these underserved areas, and they work off their debt. If there were a way to work off the debt for the government, maybe that’s a compromise, but what’s not viable anymore from any perspective, is going to be people running around with this kind of debt that will haunt them for the rest of their natural lives.”

If the government wants to play private sector bank it must play by private sector rules. When I max out a credit card gambling in Las Vegas, or if I mismanage a company into the ground, the law says to my creditors that they’re sophisticated parties and they should’ve known better than to loan me money, not to mention that it might not be my fault that I may’ve lost the ability to pay down the debt. However, this is America, where we love our banks so much that we don’t think they should be burdened with those pesky things that make capitalism work, like “risk.” Thus, if you don’t want medical students to discharge $400,000 in student loan debt, don’t lend it to them. Now, that hasn’t happened since the 1970s, it certainly wasn’t six figures of debt, and it was exceedingly rare. Rapoport should’ve mentioned that.

As for Rapoport’s happy medium (Northern Exposure, great show), rural America doesn’t require hundreds of thousands of lawyers. Moreover, those lawyers need to be paid for their work. Even if we subsidize legal aid—and we should!—that’s not going to put the government that much further ahead.

Finally, too often we think of solutions for excessive student debt, specifically government debt, as a free lunch to debtors. We have to come up with a “fair solution!” Both sides must compromise! Aside from what I said above about government reaping private sector benefits without paying the costs, the problem is that this is still too narrowly construed. Government’s purpose is to maximize national income, not revenue. When people claim that the government is “making money on student loans,” even if we assume its accounting rules work (and I don’t, nor does the CBO), it’s not! Really! If the government borrows at 0.5% and lends at 3.4% or 6.8%, the interest is money that’s not spent in the real economy, which means people aren’t employed, and—watch this—they don’t pay income taxes. There’s a real sacrifice here, trading revenue for national income, and it’s not worth making. That doesn’t mean the government should cancel all debts it’s owed, not that doing so would reduce any non-debtor’s standard of living one bit, but it does mean that these compromise solutions and happy media aren’t genuine compromises.

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4 Responses

  1. In casino capitalism, banks and other financial/political titans do not like anything resembling risk. The pigs expect [read: demand] to be absolved of their responsiblities. In their view, risk if for other people.

  2. It is morally reprehensible to enslave a person to a debt. Reinstate bankruptcy on these loans and tuition will go down once lenders realize they can’t loan to everyone. There will be less money available. Demand for classes will go down for a few years. Tuition will stabalize. Then people will be able to afford to pay cash for their education. Not allowing bankruptcy on student loans creates a false economy in which tuition rates rise at three times the rate of inflation. They have created a bubble.

  3. Just read something recently about a student loan debt collector who makes over $400k a year. This is in contrast to the salary of the US Secretary of Education, Arne Duncan, who only makes half of that. The time has come to restore sanity to student lending and our bankruptcy system. If I can charge up a bunch of credit cards, run a business into the ground, or lose my life savings in Vegas and then bankrupt the debt, I should be able to do that on education loans — which really do pay for themselves in the long run when considering the hundreds of thousands or millions of dollars a year in increased income degrees enable people to earn.

    The National Association of Realtors should join up with the National Association of Consumer Bankruptcy Attorneys in realizing that student debt, $1 trillion and climbing, is hobbling the greater economy. Unleashing the middle class from all this crushing debt sure would sell a lot of empty houses.

  4. And Congress didn’t HAVE to “lose” all that money by guaranteeing, get this, the massively INFLATED balances that lenders love to rack up… they could have limited the guarantees to the amount actually loaned – but NOOOO – they caved to their ‘owners’ and put taxpayers on the hook for life-time balances… idiots…

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