Reforming student loans

American college or gard school graduates who took out student loans collectively owe more than 1.26 trillion dollars. And by law, these debts cannot be bankrupted or dismissed by a court procedure. They may be forgiven by the government (which owns the loans) but the reasons for that are few and hard to meet, such as being rated above a very high percent disabled.

The Mises Institute reasonably says that the way we do student loans needs to change. One reason is that the default rate for the loans is more than 10 percent.

In the days following the foreclosure crisis of 2008 and 2009, approximately 10 percent of home loans were 90-days delinquent. But today, in a period when employment and earnings are vastly better than what they were in 2010, the delinquency rate for student loans is more than 11 percent, and has been that way for four years. Imagine if we were told that, year after year, more than one in ten homeowners simply weren't making payments in the midst of an economic expansion. It would be deemed an unsustainable disaster. And yet, that's what we're seeing with student loans right now.

The basic problem is that,

• everyone borrows from the government, which subsidizes the loans, and all that does is drive the overall costs up, and
• every student borrows at the same interest rate regardless of their future ability to repay.

The second bullet means that loans to students majoring in medieval German literature should be rated differently than loans to majors in chemical engineering.

If student loans took default risk into account the way home loans do, students seeking engineering degrees or — other degrees that typically lead to higher wages — would cost the borrower less than would loans made to philosophy and art history majors.

We already know, for instance, that recent graduates with economics degrees tend to pay much less of their earnings [meaning their total income- DS] toward their student loans than do philosophy majors. 

Now, I resemble that last remark! I majored in philosophy. But then, I did not borrow even one dollar for college; I was awarded a scholarship that paid full tuition, all books and all fees, plus a monthly stipend.

But the point is well taken. Economics majors make more money out the gate than philosophy majors or most other liberal arts degree holders. But their debt load is no greater, so they are less likely to default than the others because repayment is less challenging.

Which is to say that students wanting to seek high-default-risk degrees should be prepared to borrow less money than STEM majors and/or pay a higher rate doing so.

But the outlook for any kind of substantive reform is remote.

Unfortunately, that's unlikely to happen any time soon. Since a formal education at a pricey university is now considered to be a "right," nearly all students have access to subsidized, low-interest loans regardless of the likelihood that the degree program will actually assist the student in ever paying the money back.

If we're looking for reasons why delinquency rates on student loans are so high, we shouldn't have to look very hard. 

Yep.