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Fixing Student Loans

June 28th, 2019
debt, money  [html]
While it kind of looks like we have a major student loan problem, I think we really have two different problems: college costs too much, and too many people go. We should prohibit employers from considering whether someone went to college, and allow student loans to be discharged through bankruptcy.

College takes four years, tens to hundreds of thousands of dollars, and primarily benefits people by giving them an extended opportunity to demonstrate how good an employee they will be. Just like if we noticed that taller people earn more that wouldn't mean distributing growth hormone to kids would increase overall wages, more people getting degrees doesn't improve overall outcomes. (See Caplan's Case Against Education.)

Colleges face very little pressure to compete on price and high prices are seen as an indication of educational quality so the prices keep going up. Why so little pressure? First, there's means testing via need-based financial aid. Normally if you raise the prices for something some people have to stop buying it, and you stop being able to sell as much. Need-based financial aid, however, allows the college to charge each student exactly what their family can afford. But since this only affects the sticker price, it's less of an issue than it looks.

A much bigger factor is loans. College prices are high enough that few people would be able to afford to go if they had to provide all the money up front. Since most people who go to college will eventually earn enough to pay back even a high tuition, lenders are willing to pay tuition for the students now in exchange for more money later. When a student graduates, though, they now have a valuable signal (their diploma) but often very little transferable wealth. Under our normal bankruptcy laws most students would do quite well to declare bankruptcy immediately on graduation. Sure, lenders would be unwilling to offer them more money for the next seven years, at which point the bankruptcy is no longer visible to them, but with tens of thousands of dollars of debt wiped out they would have much less need for loans.

To avoid this, we've decided that student loan debt should survive bankruptcy. This makes issuing student loans into a profitable business, and makes banks willing to lend large amounts of money. Take this away, the money dries up, and people start caring a lot more about how much the college costs.

There are a range of ways we could go here. At one extreme we remove the exception for student loan debt entirely, which would more or less end the student loan system. At the other we could allow the debt to be bankruptcy-eligible after, say, five years. Lenders will then be willing to offer some money for college, but not so much that an appreciable number of borrowers will still have large amounts outstanding and negative net worth five years out of school.

(Another idea to explore here is making it easier to offer "equity financing" for tuition, where the lender receives a percentage of your income for N years instead of a fixed amount.)

But, ok, say we make loans unprofitable, college costs come down but not that much, and you still need a degree to get a job. Then kids from richer families will have even more of an advantage than they already do. This is where we ban considering whether a job applicant has a degree. The company can evaluate your skills and aptitude, but they can't consider where, or even if, you went to college.

What's weird is, this may already be the law! In Griggs v Duke Power Company, an early employment discrimination lawsuit, the court held that you couldn't require a (high school!) diploma unless you could demonstrate that it was necessary for the job:

On the record before us, neither the high school completion requirement nor the general intelligence test is shown to bear a demonstrable relationship to successful performance of the jobs for which it was used.
The idea being that companies should evaluate candidates and not circumstances. This is very reasonable, and we should go back to it. If courts aren't willing to uphold this precedent, we should pass a new law that explicitly prohibits it.

Let's move college from something that everyone has to do, to something that people only do if they have a strong reason to.

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