Student Loan Bankruptcy: Not A Free Ride
Nicholas Freiling over at Values & Capitalism—a blog run by the American Enterprise Institute—has a well meaning but utterly misguided—and I would argue, rather silly—post about bankruptcy and student loans. It is inappropriately titled “Student Loan Forgiveness: One Idea That Doesn’t Deserve to Graduate.” He says:
If you are like most college students, you have already accrued a considerable amount of student loan debt. College is expensive, and without student loans many would simply be unable to obtain a college education.
But over the past few months, many have begun to question the efficacy of borrowing so much money—even for a purpose as worthy as education. Recently, the Chicago Tribune reported that student loan debt reached $870 billion—surpassing both car and credit card debt—and is projected to climb rapidly over the next few years.
Thus, it is understandable that The Fairness for Struggling Students Act (FSSA) has become high on the agenda for many government and education officials. The FSSA would allow student loan debt from private lenders to be wiped out in bankruptcy proceedings. Seen as a remedy for a growing economic problem, the Act has found support among many in government and academic circles.
But the reality is: The FSSA is an unjust bill that should warrant no support from respectable students, no matter how indebted they are.
So basically, what FSSA would say is that student loan debt would be treated like…every other single type of debt? So it wouldn’t be, you know, a “special” and “unique” form of debt that people could not erase, but would be treated like debt from any other source, like a mortgage or a car loan or anything like that?
And this is bad thing? Where does he get this idea from?
First, no one is entitled to a college education. Despite what many progressives preach, education is not a right, but a privilege. But by forcing private banks to forgive loans for those who prove unable to repay them, government asserts that college is a right and need not be paid for.
First, no one is arguing that anyone is entitled to a college education. Okay, wait, that’s wrong—those on the left are—but still, it’s quite irrelevant to the entire topic of bankruptcy, which is what this is about. Second, “forgive loans” is quite different from bankruptcy. In a bankruptcy, you’re not being “forgiven.” In fact, you’re being punished quite severely, with a destroyed credit score, inability to secure loans in the future, and numerous other difficulties.
Believe me, you’ll pay for it—just in other ways.
Second, defaulting on loans is a privilege, and forcing lenders to forgive bankrupt lendees is a coercive affront to property rights.
No it’s not. If you can’t pay, you can’t pay. That’s it. That’s not a “privilege,” that’s an “acknowledgement of reality.” He even says it right there, “bankrupt lendees.” When you’re bankrupt, you have nothing. What are they going to do next? Slice skin off your nose?
And where, dare I ask, is the “coercive affront to property rights”? If you make a loan, you’re taking a risk, similar to an investment. If the person you loaned to goes bankrupt, you shouldn’t have made the loan. There is no affront, coercive or otherwise, to your property rights. You made a bet, and you lost. Now, if Uncle Sam put a gun to your head to make the loan, that would be different, but as far as I can see, most of the lenders in the student loan business are doing it willingly—because without the bankruptcy protection, they get their profits rain or shine.
Third, the FSSA will only encourage the increasing indebtedness of America’s youth and will do nothing to discourage underqualified students from acquiring student loans.
Uhh…completely and utterly wrong. First, it would not increase the increasing indebtedness, because while bankruptcy would wipe out those debts, it would also prevent them from getting into debt afterwards—because no one is going to loan them anything. Second, it would discourage underqualified students from getting loans, because if lenders are forced to actually investigate borrowers, and will get punished if they lend to people who won’t be able to repay, they’re going to stop lending to underqualified students—immediately.
So that paragraph is a bust.
In fact, I would argue that nearly the entire post is bust. Although Freiling does add in good points—such that college is not for everyone, banks are not evil, the entitlement culture is, and we should be encouraging diligence and thrift—none of those are really relevant to the issue of this bill and bankruptcy. Instead, what we get is the impression is that Freiling doesn’t really know what bankruptcy is. It is not a scenario where students can just sit on the couch, watch TV, and go “Oooh! Free money!” Bankruptcy is long, perilious, involves the forfeiture of assets, and involves your ability to secure credit and loans for the forseeable future to be heavily damaged. It might even cost you a job. It does, however, go away after ten years—but ten years is a long time.
Simply put, bankruptcy is not a party. It’s long, difficult, and painful. It’s punishing—but then, that’s exactly what it’s supposed to be. I think student loans should be discharged in bankruptcy, in order to return to a real free market in that industry, rather than the corrupt crony capitalism we have now. In fact, since it is a free market bill, I wonder why Freiling is against it?
Mr. DURBIN (for himself, Mr. FRANKEN, and Mr. WHITEHOUSE) introduced the following bill; which was read twice and referred to the Committee on the Judiciary