Carrying Some Student Loan Debt Never Hurt Anyone: Megan McArdle

Tuesday, 10 June 2014 03:07 PM

June 10 (Bloomberg View) -- Student loans seem to be the same sort of evergreen political winner for Democrats that tax cuts are for Republicans. Every month seems to bring another plan to fiddle with student loans to make them less expensive for the students and more expensive for the government. Massachusetts Senator Elizabeth Warren has a bill out that would let student loan holders refinance at lower rates; President Barack Obama is signing an executive order to open up especially generous income-based repayment terms to millions more students, even if they don’t have a financial hardship. My friend Mark Kleiman thinks that anyone who is paying attention to items like these has no choice but to become a fanatical partisan Democrat.

Well, I have been paying quite a lot of attention to student loan issues, and I haven’t yet taken the step of becoming a Democrat, much less a fanatical partisan one. I haven’t even taken the lesser step of endorsing these plans, which I think are a bad idea.

How could I be against helping these students, groaning as they are under the weight of student loans? I’m so glad you asked.

Before we go any further, however, let me establish my bona fides on huge student loans. I am familiar with the problem. Intimately familiar. Almost-six-figures-worth-of-student-loan-debt-on-a-$40,000-a-year-salary familiar. Which is to say, I lived in a subterranean 435-square-foot apartment for years, eating ramen and Cheez Doodles and heartily regretting my decisions regarding education loans. Oh, and I was 30, not 22. This is what happens if you get an MBA expecting to use it to do something lucrative, such as management consulting, and instead use it to do something fun, such as journalism. I am now happily debt-free, but every check written to clear those loans is seared -- seared! -- into my memory.

So I am hardly unsympathetic to the plight of debt-laden graduates who were perhaps a trifle overoptimistic about the earning power that their degrees would eventually confer upon them. Nonetheless, I do not think that we should use taxpayers' hard-earned money to make their debt cheaper. Driving down the interest rates on education debt should not be a policy priority.

It’s good to remember, as we discuss these plans, that people with college degrees are the best-off people in the U.S. They are a cognitive elite with substantially more earning power than almost anyone else, unless that someone else can throw a mean fastball, dunk or get their body fat down to less than 4 percent by the time their feature film is ready to shoot. It’s hard to see why we would take money from other people and give it to this group.

People with lots of student loan debt and low earnings are, of course, a particularly visible group to journalists, who cluster in expensive cities and know a lot of expensively educated people. It’s not surprising that a huge number of articles get written about this problem. But it’s still disproportionately a problem of the affluent. And the government already spends quite a lot of money on benefits for the affluent.

If we wanted a program to help the majority of the population, we’d offer loan guarantees to help poor people get access to reliable cars so that they could have a better shot at getting -- and keeping -- a well-paying job. I know you’re thinking that sounds crazy, but if you spend any time listening to the problems of working-class people -- many of whom lacked the opportunity, the interest or the academic ability to get through college -- you’ll get an earful about the problems of driving a beater that constantly breaks down. A small amount of capital could make a much bigger difference in their lives than extra student loan relief for middle-class college kids would.

I say “extra” because we already have a very generous income-based repayment system for student loans. The IBR program allows you to hold your loan payments to no more than 15 percent of your discretionary income and stretch out the payment term to 25 years, after which any remaining debt is forgiven. To be sure, you have to have a partial financial hardship to qualify -- but the “financial hardship” is that . . . your payments on the standard plan would be more than 15 percent of your discretionary income. As someone whose initial loan payments were closer to 50 percent of her discretionary income, I can testify that that’s a pretty sweet deal.

At this point, someone in the audience is mentally complaining that I don’t understand the impact student loans have on family formation . . . buying a house . . . saving for retirement. But au contraire: I understand all too well; I refer you to paragraph four. However. Some perspective is useful:

This graphic comes from a 2012 Federal Reserve report. While you may have heard the horrifying statistics about how the average borrower has almost $30,000 in student loan debt, the median borrower has more like $12,000. That number gets dragged upward by a small number of students with huge loans -- many of them professional school graduates like me. The overwhelming majority of borrowers have less than $25,000 in debt, which is to say something more like a car loan than a mortgage. Yet we do not argue that we need to reduce the cost of car loans lest the Toyota Camry should keep yet another generation of Americans from the precious boon of homeownership.

It’s not that the horror stories about people with low earnings and huge debts are imaginary -- I have not only read those stories, but have also been one of them. However, that group is relatively small. And in order to give them an extra break on their payments, the president and Elizabeth Warren are proposing that we should also give a whole lot of money to folks who don’t really need it. That’s bad public policy; moreover, it’s not particularly progressive public policy.

That said, I do think we should do something to help people who are genuinely stuck with debt that they will never realistically be able to pay. We should end the exemption of student loans from bankruptcy so that anyone who is overwhelmed by debt can go to court and get a genuinely fresh start. The special treatment of student loans is an outrageous bit of self-dealing by the government, which appears to be fine with debt slavery as long as Uncle Sam gets to be the master. It should stop.

Of course, that might bring back the problem that the bankruptcy exemption was originally enacted to prevent: the practice of getting an expensive professional education, immediately declaring bankruptcy as soon as you graduated, and saving yourself $100,000 or so in loan payments. (It’s not clear to me that this practice was ever widespread, but it certainly made for juicy headlines.) It seems reasonable to put some sort of limit on the ability to bankrupt student loans, like a rule saying that you can’t file within five years of graduation, or within 10 years of taking out the loan, or whatever we decide is just.

What doesn’t seem reasonable to me is declaring that no way, no how, can you ever get rid of this stupid decision you made at the age of 19. Or, conversely, saying that no one should ever have to pay any significant amount of their income for their college diploma. What’s missing is balance, and that’s what bankruptcy provides: relief for those who really need it, and a few years of ramen and Cheez Doodles for the rest.

To contact the writer of this article: Megan McArdle at mmcardle3@bloomberg.net.

To contact the editor responsible for this article: Brooke Sample at bsample1@bloomberg.net.

-0- Jun/10/2014 13:03 GMT

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