President Obama made it clear in his State of the Union address that two areas of focus going forward will be education and “fixing what is broken” in the federal government. The most meaningful way for the president to demonstrate this — on both fronts — lies in the federal student loan system.
Like subprime lending, the student lend…ing system has been corrupted deeply, enabling college prices to rise faster than both housing and health care over the past three decades. Today, we owe an astounding $1 trillion in student debt, and instead of decreasing in the slow economy, borrowing has accelerated massively to keep pace with record-breaking tuition increases.
Unlike loans for housing, student loans were stripped of bankruptcy protections and nearly every other consumer protection Americans assume is there when they borrow. At the same, time, Congress gave the student lending system collection powers so draconian that big lenders, guarantors and likely even the Department of Education make far more money on defaults than healthy loans. The predatory lending environment that has resulted is not tolerable in this or any other country. On this there is no debate.
As Harvard Law Professor Elizabeth Warren, who established the government’s new Consumer Finance Protection Bureau, put it: It’s impossible to buy a toaster that has a one-in-five chance of exploding, but similar standards aren’t imposed on financial products. Indeed, education loan defaults have been greater than one in four for many years and are probably between 30 percent and 40 percent today, yet the Department of Education has never warned the public. Congress, too, needed to know this as they debated whether to raise loan limits time and again. But they were shown only misleading cohort rates that reflected a small fraction of the true default rate. As a result, students now borrow far more than their educations are worth, and they (and often their co-signing relatives) are being decimated.
Ultimately, the removal of bankruptcy protections is the root of this mess, and their immediate return is the solution to both the systemic exploitation of borrowers and the prices being charged to all students, rich and poor. Economists and true conservatives everywhere should agree with this assertion. And as the American Street demonstrates, the problem has escalated past the point where the public will tolerate political or administrative games that perpetuate this harm.