The Problem with Getting Rid of Student Debt

                Although this may sound odd coming from a person committed to solving the student debt problem, I do not think student debt is totally bad.  I believe there are aspects of student debt that are really good.   When I imagine fixing the student debt problem; I don’t imagine school being free. I imagine a world where student debt gets properly invested. Where loans go to institutions that lead to good careers; and the schools that suck go bankrupt.

   

   In order to solve the student debt problem we first have to understand the problem. The problem is not that student debt exists, the problem is that the debt is misallocated.  Misallocation is an economic term that means a bunch of loans are going to total crap.

                Here is the thing. The US primary and secondary schools perform poorly compared to most developed nations. But, somehow, the US is one of the most productive nations. Think about top global companies; especially knowledge economy companies, and mostly US companies will come to mind. I attribute this to the fantastic higher education system in the US. The Higher Education system in the US is great, in part because we pay for it. It’s a free market and people choose which schools they attend.

               I don’t want the solution to the student debt problem to destroy the great Higher Education system in America. When I think of getting rid of student debt I see three really bad possibilities.

   First, student debt could be gone if Higher Education becomes government run; or government paid for, which over a long enough time period is essentially the same thing. This would make the Higher Education system follow the model we use for primary/secondary schooling. That would be tragic. That model performs poorly and costs much more than other higher performing countries. Another fear about government involvement is with inequality. When something is free and limited; there will always be factors other than price to determine who gets it. Many countries use a testing system; where college is free for those capable of testing into it. Who do you think tests better; kids from poor school districts or kids from wealthy school districts who can afford tutors and test prep classes?

               The second way student debt could be gone is the Mark Cuban plan for a government law to limit the amount of debt people can have for Higher Education. Let’s say the max one can borrow is $10,000. This would result in college being inaccessible except by the rich, who don’t need to borrow for their kids to attend college.

                The third “solution” for student debt is if the government forgave it. This brings up a critical point. One person’s debt, is another’s asset. The government owns the vast majority of student debt, about $800 Billion dollars. Forgiving student loans would mean a $6,000 tax bill per taxpayer. Plus, this wouldn’t solve any of the systemic issues the Higher Education system faces.

                My next post will outline how the bankruptcy laws should be changed for student loans. It’s a simple solution that helps people in bankruptcy and will protect creditors from doctors/lawyers/others declaring bankruptcy immediately after college and then taking 6 figure jobs.