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Monday, September 1, 2014
Note for "Super Wednesday" - Either Party Can Occupy the Student Loan Issue
Originally Published on forbes.com on March 7th,2012
Blame it on Occupy Wall Street. They got me going on the student loan crisis. Thank Allan Collinge who has given me some great guest posts on the topic. He is back again with an analysis of how the issue might play out in the Presidential campaign
In late 2006, I was buoyed to see the Democrats ride a populist electoral wave to control of both House and Senate. This is because Republicans had so badly abused the citizens (and their own free market principles) on behalf of Sallie Mae and other student loan companies by removing bankruptcy protections,refinancing rights, statutes of limitations, and other fundamental protections from student loans, and also by defending, generally, a corrupted system that was, even then, showing signs of becoming a monstrosity. The Democrats had said “help is on the way”, and it couldn’t have been more eagerly anticipated.
But the Democrats, frankly, blew it. They couldn’t (or wouldn’t) even returnbankruptcy protections to private loans, something that everyone assumed would be the first thing accomplished under the new Congress. What they did do, I must report, is exactly what they are always accused of: champion big government by taking over the lending and guaranty function for all federal loans. Despite the populist rhetoric, any honest Democrat must admit that the bureaucracy was the big winner on the student loan issue during their reign, not the students. Other legislation that they might point to during this time proved to be easy to circumvent (Kennedy’s Student Loan Sunshine Act), or simply not very impressive (interest rate reductions for subsidized undergraduate loans). Nothing they did addressed the spiralingtuition rates, or the systemically predatory underpinnings of the system that enabled this inflation. This has dramatically affected both rich and poor students, borrowers, and those who pay for college out of pocket.
Today, given widespread, and growing protests across the country, a default rate approaching systemically critical levels, and a trillion dollars in outstanding loans, it is clear that what has been tried has not worked, and new strategies are clearly (and urgently) needed. As such, this issue offers both parties a unique opportunity to both make good on their campaign promises, and also defend their guiding principles. It would be most encouraging to see this play out in the presidential campaign.
For President Obama and the Democrats, this issue cries out for better, not more government. This is a theme Obama embraced on the campaign trail in 2008, and one that resonated strongly with the citizens then, and far more strongly today. After all, the Department of Education has known that students were defaulting at a rate greater than 25% for years, but stood by as schools and lenders mislead the public by substituting the “cohort” default rate, which only counts a small fraction of the actual number of defaults, for the actual rate in marketing the school to prospective students and their families. The Department also failed to warn Congress every time they were considering raising the federal student loan limits. Had Congress known that students were defaulting at a rate well in excess of Elizabeth Warrens “exploding toaster” threshold (1 in 5), one must believe that they would have frozen, or even decreased the lending limits years ago, instead of greenlighting increases again, and again.
These gross examples of the Department neglecting the interests of the public are only a few of many that could be cited. Suffice it to say that there needs to be a massive change in the corporate culture there, and President Obama could make that happen today, and probably should have years ago in the name of good government (or even barely adequate government, to be more accurate). The student and citizen protests currently proliferating across the country underscore the need for this, and hopefully will be taken seriously by his campaign, if not the current administration, going forward.
On the Republican side, the presidential candidates have a similar opportunity to side with a growing number of conservatives in pushing for the return of bankruptcy protections to all student loans. This will demonstrate to middle income voters that true, free-market principles can, indeed, work for the working class, and that they are willing to fight for these principles regardless of class concerns.
While no one wants to file for bankruptcy protections on student loans (or any other type of loan for that matter), their removal from student loans has clearly caused a systemically predatory lending system the likes of which this country has never seen, and has also enabled the intolerable tuition inflation already mentioned. I’ve described this predatory “scam” previously on these pages, so I won’t say more here, but suffice it to say that when the lenders, guarantors, and even the Department of Education are making, not losing money on defaults, as is the case here, their fiscal motivations go against the borrowers, not with them, and this completely wrecks the system with all manner of failures. This is what removing bankruptcy protections has led to, and what must be corrected if there is to be any hope for the viability of the student loan system going forward.
With bankruptcy protections returned to all student loans, the Department of Education will be forced to have skin in the game for the borrowers, not against them, a condition that Adam Smith or any other free market economist would agree is necessary for a healthy, capitalist lending system. This would both light a fire under the Department of Education to use its massive leverage over the colleges to provide high quality educations at the lowest possible costs, and also cause the Department to crack down on the servicers, lenders, and guarantors who currently have no financial incentive to provide quality loan administration (in fact, many lenders have been caught defaulting loans without even attempting to collect on the debt!).
In my opinion, the Republicans are looking up a steep hill on this election, and can’t rely on social issues or increasingly questionable trickle down theories to carry the middle income vote. I’d say that showing the people that the invisible hand can, and should work for middle class citizens is absolutely necessary if the Republicans are to have any chance this November, and I can’t see any action that would better demonstrate this point.
The President should see the value of cleaning house, and act immediately by way of simply doing his job. The voters will be far more impressed with an accomplishment like this than a vague campaign promise for the future. Similarly, Republican candidates- even those calling for an end to federal student loans- should be compelled, here, as a matter of campaign strategy, and more generally, as champions of conservative capitalism.
And if both sides do what is clearly needed from them on this issue, the citizens will absolutely benefit, regardless of the outcome of the election in November. Seeing the two parties complement each other, if only on this one issue, would be a much needed change from the gridlock, partisan drama, and legislative inaction that the public can no longer tolerate.