Sunday, April 29, 2012

Look out, politicians are trying to "help" people again!

Student loan reform

Dick Durbin (D-IL) and other democratic senators are introducing legislation (link above) that will allow students to declare bankruptcy to get out of student loan debt.

From John Conyers (D-MI):

“There is no principled justification to treat private, for-profit student loan debt differently from other kinds of unsecured debt such as credit cards, payday loans, or personal loans under bankruptcy law. Yet, by not allowing private student loan debt to be discharged in bankruptcy, except in the most extreme circumstances, current law is working against these borrowers.”

John Conyers and the rest of the democrats supporting this bill are (shocker) not thinking things through. Or maybe they are and just don't care. Assuming the former, I will try to enlighten them.

1. Unlike credit cards, student loan debt can be very large and is completely unsecured. If you declare bankruptcy on a credit card, assets bought with that card can be reclaimed by the lender to compensate them (assuming you didn't run up the bill with a trip Thailand). Lenders cannot reclaim the human capital bought with student loans. Also, because credit card debt is still relatively unsecured (see Thailand trip) compared to home loans and such, unsafe borrowers face high interest rates and low credit limits. How much help would a $1000 loan at 19% provide to someone who is trying to pay their tuition? My guess is not much. But these are the kind of terms that payday loans and credit cards get. And this is what Mr. Conyers thinks the student loan market should aim for?

2. So maybe congress can cap interest rates right? If they do that and banks can't make money on student loans, no private student loans will be offered and then students who need the money will really be screwed. Talk about limiting their ability to go to college.

3. Say all of this works out and there is some way that banks still make loans that some people can afford and banks find profitable. The threat of bankruptcy is still going to increase interest rates on student loans since interest is determined by the risk of default. With bankruptcy as an option that risk has surely increased. So the students who do repay their loans and are responsible borrowers will have to pay higher interest rates to make up for the losses that the banks will incur when other less responsible borrowers declare bankruptcy. Obama and the democrats are always talking about not wanting to screw people who play by the rules, so why are they screwing the students who pay back their loans?

This is just another example of politicians pandering to the people who do not think things through. Allowing people to declare bankruptcy on unsecured loans like student debt leads to higher interest rates and less supply. If you want to limit the ability of financially strapped kids to go to college I can think of no better plan than Mr. Durbin's.

More recent WSJ article on student loan reform

No comments:

Post a Comment