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Michael Olenick: How Biden Could Tackle the Student Loan Crisis

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Michael Olenick: How Biden Could Tackle the Student Loan Crisis

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Yves here. The wee problem with the Olenick plan, as readers know well, is that Biden does not appear willing or able to change his spots. The Senator from MBNA who pushed hard for the passage of the 2005 bankruptcy “reform” act, after it had failed previous Congressional votes, isn’t the sort to admit error. Witness his campaign efforts to justify his support for the “superpredators” bill, or the appointment of Iraq War fanboy Anthony Blinken to State.

The very fact that top bankruptcy professor Elizabeth Warren never once advocated for discharging student debt in bankruptcy speaks volumes about Democratic party priorities. They find it easier to stump for complicated programs (which typically have complicated documentation requirements) rather than a Gordian knot approach which would also give relief to the most distressed. And it’s not as if declaring bankruptcy is a party; it’s stressful and commonly seen as a big black mark by recruiters.

The reason for the reluctance to do anything other than tinkering or one-offs, even if potentially large ones, is that higher education, both the instructors and the administrators, are a solid Democratic party bastion. Can’t threaten those meal tickets, even if the resulting debt peonage is making “socialism” a good word among the young. As Olenick added by e-mail:

I think it is implicit that my belief is the entire system is rotten to the core from the cost of tuition to the loans; it needs a serious rethink. There are hoards of administrators, elaborate gyms, wildly expensive sports programs (students don’t get paid for), dorms that are nicer than most houses, and professor pay that’s way beyond anything they could earn in the private market; the entire system is broken.

To keep students in supporting it – and justify all those people – schools make graduation requirements ever harder. I had a friend who was working on a two-year associate degree at a state-run community college. That required a full year of accounting (financial and managerial), calculus, and a year of econ (macro and micro). I think the econ classes were reasonable though the textbooks, for introductory macro and microeconomics, cost over $200 each, the same bloated pricing for all the classes. The math classes required expensive textbooks that had an online component so couldn’t be resold. Krugman’s textbook lists for $316.25 on Amazon and is on the sixth edition because, you know, introductory economics for two-year degree students has radically changed since the first edition was published in 2005. Amazon sells a “printed access code,” for the fifth edition, for a mere $115.24. It’d be interesting to hear Krugman’s thoughts on the textbooks that bear his name and their effect on the cost of college, access to college, and the student loan burden they eventually cause.

Nevertheless, it’s useful to throw down fixing bankruptcy as a marker against which to measure what if anything Biden actually does on the student loan front.

By Michael Olenick, a research fellow at INSEAD whose recent articles can be read at at innowiki.org

Countless people are pressing President-elect Biden to solve the student-loan crisis through executive order, forgiving $50,000 of student-loan debt. Additionally, Biden has proposed the atrocious idea of the US buying up to $10,000 of private student loan debt.

I 100% agree with the need to deleverage the student loan burden but not so much the proposed means.

Before readers throw lawn darts, hear me out because I suspect we’re all on the same or a similar page.

There’s about a $1.7 trillion student loans outstanding, acting like a boat anchor tied to the ankles of people as they try to thrive in the modern US. The 80s TV show “thirtysomething” showed young people frustrated in careers as architects stymied by a boss who just didn’t understand. Today’s thirtysomething’s, with more degrees, are living in their parent’s basements working three dead-end jobs. They can’t afford houses, can’t start businesses, can’t have children, and can’t even get married lest they expose a spouse legally to their student-loan burden.

If the as-is student loan system existed forty years ago, a young Steve Jobs – who’d focused on calligraphy and ancient art classes – would be working as a bartender rather than attending the Home Brew Computer club on his way to founding Apple. There are few similarly historically economically destructive analogs beyond slavery.

A Brief Background

Briefly, for those not in the know, there are three general types of student-loan debt. The first is government-guaranteed loans where a private or semi-private business lends the funds that are guaranteed by the US (Sallie Mae started out as a government sponsored enterprise but privatized). Next are funds lent directly by the US to a student. Finally, there are private loans that are not guaranteed. All three type of loans are collected by servicers and, under current interpretations of federal law, they’re all ineligible for bankruptcy relief except under dire circumstances.

Biden may be able to forgive the money lent directly by the US government without Congressional approval that Republicans would never agree to. That becomes far iffier for the funds lent by third-parties but guaranteed by the US. It’s impossible for private loans.

Furthermore, forgiving the debt would likely be classified as a “taking” so bill collectors (er, I mean “servicers”) would theoretically be due all the funds they would’ve otherwise collected. Students get some relief … maybe. Collectors collect a windfall. For Biden’s private loan relief idea, “investors” – who, let’s face it, are largely predatory lenders – get paid back funds they might never otherwise collect. Oh yeah, if the scheme works students are on the hook for taxes for the discharged amounts; tax bills they can’t afford.

Bailing out predatory lenders and bill collectors, for amounts they’d likely never otherwise recover, sounds like a shitty dealquoting former Sen. Carl Levin. Especially when it saddles students with IRS debt instead of student loan debt; frying pan, fire and all that. I’m also a first-generation college student; the only one of my siblings to finish an undergraduate degree so I get how difficult it is. I took out my first student loan at 17, worked all through undergraduate and law school, and only paid the loans off in my 40s. Those loans functioned like an anvil tied to my ankle while trying to stay afloat; the stress and opportunity costs were immeasurable.

Bankruptcy

There’s a better solution. The Donald Trump special … bankruptcy.

Right now student loans are all but ineligible for bankruptcy discharge due to a judicial interpretation. Under federal law, student loans may be discharged for “undue hardship” which, absent a legislative definition, courts have defined as being braindead. Owe 120% of your take home pay to student loans? That’s not undue hardship according to judges because you might, someday, make more money (never mind that’s unlikely since you can’t do much to advance thanks to the loans). Very few people meet the undue hardship standard.

The decrees of unelected, unaccountable, and typically wealthy law school grads who ended up as judges decided the poor schmucks who didn’t do as well should be sandbagged with student loan debt forever.

Reagan Accidentally Rides to the Rescue

There is an easier solution; Biden’s various agencies can define “undue hardship” to a standard ordinary people meet.

There’s a strong precedent for this. Up until 1982, stock buybacks were defined as “stock manipulation” making them all but illegal. Rather than push to have Congress change the law, Reagan’s regulators passed a rule that buybacks, under certain circumstances, were legal as long as they confirmed to certain base rules.

Reagan used administrative authority to change the definition, bypassing asking Congress to change the law.

Businesses went wild over future decades buying back far more stock than they invested in R&D or anything else. They not only used all extra profits to buy back their own stock, bumping up executive pay as a side effect, but even borrowed money to buy back their stock. Today, about 20% of large businesses owe more in debt payments than they make in profits largely due to borrowing for buybacks, though I digress.

If Reagan’s SEC can change the definition of what’s kosher for a stock buybacks then Biden’s DOE can change the definition of “undue hardship.” And, oh yeah, if courts decide Biden can’t change the definition then the original change enabling buybacks also disappears, not that I’d recommend legislative hostage taking or anything.

Defining “undue hardship” for student loan discharge eligibility as loan payments more than, say, 10-percent of net income in the prior year would free countless students to file bankruptcy and discharge student loans and other debts.

Well-meaning students would rid themselves of predatory loans they took out before they were too young to drink. Loans taken out by seventeen-year old’s – who were too young in many states to consent to sex but old enough to sign off on loans that can never be eliminated – would finally be eligible for bankruptcy relief.

Besides breaking through the artificial $50,000 cap on loans, this method would also stiff student loan bill collectors on unrecognized profits, as they should be. Debt discharged in bankruptcy isn’t taxable, eliminating that burden. Mitch McConnell & Co. couldn’t do anything about it: like the rule-based change enabling stock buybacks this change would be entirely up to administrative authorities; most likely the Dept. of Education. Even those who say student borrowers shouldn’t get off the hook easily are appeased because – though I’ve never personally been there – I’ve worked with enough others to know that bankruptcy sucks, though it sucks less than the lifelong burden of student loans.

Public Policy

Like I said above, I’m a first-generation college grad. Nobody in my family graduated college much less earned a graduate degree. I did but with lots and lots of student loan debt that sandbagged me for years. I eventually paid it off but, when I compute the opportunity cost, that debt was insanely expensive. Do I resent it? Absolutely. And so should the people who’d be employed by the budding businesses I would and could’ve built but for servicing that debt.

When I took out those loans they were eligible for discharge in bankruptcy then Congress changed the law after the fact. They kept changing the laws, making student loan discharge in bankruptcy ever harder. Their initial reasoning was it wasn’t fair since tax money was involved but they dropped all pretense with the Bankruptcy Reform Act of 2005 when they subjected private student loans to the undue hardship standard. That was supposed to lower the cost of the loans but, surprise, the costs didn’t budge. If the rules can be changed after the fact to the detriment of borrowers then the same can be done after the fact to the detriment of lenders.

It would be irresponsible to ignore that easy availability of student loans led to enormous tuition inflation with the funds sometimes being used for questionable purposes. In the interest of keeping this an article rather than a dissertation, I’ll pass going into detail but some expenditures and salaries need to be reviewed.

The founders of the US realized the need for bankruptcy and specifically enabled bankruptcy in the Constitution. Why? Because the possibility of bankruptcy enables risk which encourages innovation; it’s the reason the US smokes other countries for startups. Countless countries want to see the secret sauce of Silicon Valley. It’s not the weather. Check out California’s ban on the enforcement of noncompete clauses coupled with American bankruptcy law to get an idea. Plenty of colonialists came to the US to escape serfdom, including lifelong debt slavery. Bankruptcy was their solution. It’s time to make student loans again eligible for discharge in bankruptcy.

 

 

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