Mark Russell: How Do You Solve a Problem Like Student Loans?

Mark Russell

I have read numerous articles over the past two weeks that describe in detail the challenges that students, and in many cases their parents and other family members as well, are facing when trying to pay back their student loan debts.

The primary reasons for these challenges have also been well documented – uncontrollable increase in the cost of a college education; access to “cheap” public student loan financing, and even private loan options; ignorance of students and their parents as to the long-term financial implications of taking on large student loan debts; and a troubled economy with a stubbornly high unemployment rate particularly for recent college graduates and college drop-outs.

Yes, the cost of attending college is increasing every year on average 8-10%. Yes, students attending college have the ability  to finance virtually 100% of their costs with public and private loans even without a co-signer. Yes, students and their parents/family members do not necessarily figure out in advance how much it will cost to pay back their student loans and whether or not it is feasible for the student to obtain a job post-graduation that will enable them to pay the loans back. And yes, no one can accurately predict how the economy will be doing when the student graduates, and therefore know that the student can get a job in time to start paying back the loans.

Guess what? These are the main reasons why the default rate for student loans is hovering around 10% and continuing to climb.

So, what do we do about it? Senator Durbin wants to allow private student loans to be discharged in bankruptcy. As of today, public and private student loans cannot be discharged in bankruptcy. Senator Durbin is pushing for this new law because he feels it will help those students who are being forced to declare bankruptcy because of their overwhelming student loan and other debt burdens. While I question the impact of this change in bankruptcy law on the overall issue surrounding student loan debt (private loans now represent between 10-20% of total student loan debt issued), ironically Senator Durbin is supporting the notion of private lenders implementing underwriting standards. Why? Because, if private student loans become dischargeable in bankruptcy, private lenders will modify their interest rates to take into account the potential risk of borrowers declaring bankruptcy based on the level of bankruptcy filings. I’m not sure that Senator Durbin would be supportive of this but again, given that private lending is a small portion of the total student lending market it may not be considered that big of a deal.

What about the government? Should there be underwriting standards for public debt? Many politicians and borrowers would emphatically say no, citing that this would cause discriminatory lending practices and restrict certain populations of students from being able to obtain a college degree. Fair enough. I agree that we shouldn’t implement underwriting standards that would impose these types of restrictions and I also agree that the government has already imposed a lending limit per year that somewhat limits the risk exposure to a individual borrower.

So instead of having underwriting standards for individual public and private student loan debts, what about a limitation on the total amount of debt a student can obtain in a year and/or to obtain a particular degree? This is an interesting idea in that it would require students and their financial supporters to figure out where the student can go to college based on affordability. While I appreciate that students should have the right to choose where they go to school, I can also get comfortable with the notion that limitations have been set to protect the students and their families from being overwhelmed with student loan debt post-graduation.

Another interesting idea is putting a restriction on how much public and private colleges can charge students to attend their schools. This seems less plausible to me particularly given the capitalistic nature of our society, but would certainly help limit the increase in the cost of a college education going forward.

We have all learned from this last Great Recession that there are no guarantees when it comes to the economy and job markets. While we can’t control everything, we can decide how much we, and our children, agree to borrow to attend college. It is important that we make the right decisions, as these decisions will have a lasting impact on our future livelihoods and ability to support the economy.