The Student Loan Problem

You may have seen the recent story about the 41-year-old doctor who graduated from medical school in 2003 with student-loan indebtedness of $250,000 that has since swelled to more than $555,000. She is now scheduled to pay $990 per month until she is 70 years old. Ouch!

This is an extreme example of a widespread problem. Only 40 percent of the $730 billion of outstanding student loans are actively being repaid. This isn’t healthy for financial institutions and it isn’t healthy for many young Americans. Just as was the case with the ongoing mortgage fiasco, there is plenty of blame to go around for this sorry state of affairs.

It’s easy to say that those who borrow to pursue their post-secondary education bear the primary responsibility. The first rule of survival in a market economy is caveat emptor (“let the buyer beware”). Nobody forced anyone to go into debt.

Still, it is significant that almost all student loans are taken out by Americans too young to know what it takes to pay their bills and make a living on their own. Undoubtedly, some unscrupulous students will borrow money with every intention of avoiding repayment; however, I believe that most borrowers sincerely intend to fully repay their debt. The problem is—due to their lack of maturity and, yes, intellectual development—they literally have no idea how hard it can be to repay $50,000 or $100,000 of debt.

My wife and I recently entertained two of her former college students—intelligent, talented young ladies laden with considerable debt. The one owes over $100,000 and has a bachelor’s degree in theatre. She has an entry-level position with a business, and no realistic prospect of repaying her debt before she turns 40. Much wiser now at age 23, she realizes the gravity of her predicament. She most emphatically wouldn’t have sustained such debt if she had known then what she knows now, but now she’s stuck.

Like many young adults in her position, the price for her indebtedness is more than monetary. There are very few young men out there who are willing to marry somebody with a six-figure debt chained to her ankle. (Apologies to all the romantics out there, but that’s the way it is.) Here you have someone whose strongest desire is to be a wife and a mother, but her student-loan debt makes her a leper to most men in the marriage market. Sad.

I have heard people suggest that colleges and universities provide debt counseling to students so they don’t get in too deep. My employer, Grove City College, requires students to attend debt management seminars as a requirement for participating in its privately-funded loan program. That is a wonderful program, but the reality is that colleges are businesses and, like all businesses, are hungry for revenue. Expecting them to counsel students to drop out or transfer to an inexpensive junior college is like expecting a fox to warn chickens not to go into foxholes because they might be eaten. It just isn’t the nature of the beast.

That leaves the lenders. As was the case with defaulted mortgages, lenders protest that they explained the dollars and cents of the student loans thoroughly. And again, it is safe to assume that some of them really did, just as some of them really did not alert starry-eyed, naïve youngsters to the pitfalls inherent in taking on large debts. Let’s face it, if loan officers profit from issuing loans, they have every incentive to write as many as they can.

Normally, I would say there is nothing objectionable about that, but in this case, I believe that public policy once again is guilty of having altered normal market incentives. I refer to laws that make it almost impossible for student loans to be erased through bankruptcy.

Now don’t get me wrong—I believe strongly that debts should be repaid. A society that makes it too easy for individuals to walk away from their financial obligations does not sufficiently uphold the foundation of economic progress—property rights—and consequently jeopardizes economic progress. But in the student-loan market, government has created moral hazard: Knowing that government will take extraordinary measures (even garnishing unemployment checks) to see that student loans are repaid, issuers of student loans feel bulletproof, and proceed to crank out as many loans as they can. If they knew that they might lose their loans through normal bankruptcy proceedings, they would do what prudent lenders always should do: Assess risk very carefully and issue fewer loans to starry-eyed kids who want to pay $30,000 per year for a degree with minimal market value.

I don’t pretend to know how to get out of the current mess. It would have been much preferable had we never gotten into it. I do believe, though, that it isn’t right for financially incompetent young Americans to be penalized for decades because no adult who knew better stopped them from making a foolish financial mistake. Let’s have some mercy here.