Every year as students graduate and enter the workforce, the media is prone to write stories that chronicle the lives of selected students as they struggle with student loan repayments. They usually write sad pieces on how loan payments make it difficult for students to live as they’d wish.
A recent study by the College Board entitled “How Much Debt Is Too Much? Defining Benchmarks for Manageable Student Debt,” by Sandy Baum of Skidmore College and Saul Schwartz of Carleton University, jumps into that issue. The authors, while finding that only a small minority of students have trouble managing their student debts, suggests several “policy” changes that they believe should be made.
The body of the paper consists of the authors’ analysis of an appropriate “benchmark” for how much debt it’s prudent for students to have. Their concern is that with too much debt, former students will have to sacrifice or delay other major things in life, such as home ownership. After much analysis and discussion, they say that “repayment will rarely be a problem if payments are below 7 percent of income and that few students would be well advised to exceed 17 percent.”
That’s probably very good advice, but Baum and Schwartz don’t want to stop with advice. They advocate several policy changes that they think will protect students against being oppressed by their college debts.
Paramount among those policy changes is a loan forgiveness program that would wipe out the debts of students who are not earning enough to make the payments without hardship. Other policy recommendations include establishing an income-contingent repayment plan and provisions for discharging educational loans in bankruptcy.
The idea that it is the duty of the government to protect individuals against the consequences of their own decisions has been called the “Nanny State Theory.” Here we see it very clearly. If a person borrows too much, it’s up to the government to come to the rescue, not up to the person to find ways to meet his obligations.
Let’s look at each of the authors’ policy recommendations starting with loan forgiveness programs. They write, “[s]tudents who end up with very low postschooling income should be allowed to suspend repayments and possibly have the interest on their outstanding balance subsidized.” It is too bad if a former college student has a low income and finds it difficult to make the required payments, but why should taxpayers have to bear the cost of that misfortune – which may only be temporary?
When people know that there is a government “safety net” below them, they are apt to act less cautiously than otherwise. Here, one outcome could be that students will decide to attend more expensive colleges and borrow more to cover the cost.
Baum and Schwartz also favor “income-contingent” loan plans, where the amount that the student has to repay would to some extent depend on how well he succeeds in post-college employment. The trouble with this idea is that a debt is a debt – a fixed amount that has to be repaid with an agreed rate of interest. There is no reason why the amount the borrower repays should depend on his income. If a business borrows money to finance a new factory, the bank doesn’t say, “Your repayment will depend on how profitable the factory is.” It’s more Nanny Statism to say that you get to pay back less if you have not found a job that pays well.
Finally, as to discharging student loan debts in bankruptcy, many people argue that it’s already too easy to escape from debt by declaring bankruptcy. It isn’t clear that moving to allow more debt – student loans – to be wiped out is the right way to go.
Students should get all the information they can about student loans, scholarships, and other approaches to paying for college and use that information to make the decisions that are best for them. We don’t need government involved to do that, nor do we need government to hold a student’s hand if he winds up having borrowed more than he should have.
One last point to keep in mind: What the authors are attempting to do is make it so that more students are able to attend college. That benefits the supporters of their paper, the College Board, because most colleges and universities require applicants to take that organization’s SAT exam.