A Big Debt Problem, A Small Debt Solution
by Daniel Luzer
The Consumer Financial Protection Bureau has issued a scary document about student loan debt. The debt is big and it stays with you for life, no matter what happens to you financially. The document comes with some rather curious policy recommendations, however
According to the report:
Fueled by investor appetite for asset-backed securities, the financial institution private student loan market grew from less than $5 billion in 2001 to over $20 billion in 2008, before contracting to less than $6 billion in 2011.
In 2009, the unemployment rate for private student loan borrowers who started school in the 2003-2004 academic year was 16%. Ten percent of recent graduates of four-year colleges have monthly payments for all education loans in excess of 25% of their income. Default rates have spiked significantly since the financial crisis of 2008. Cumulative defaults on private student loans exceed $8 billion, and represent over 850,000 distinct loans.
Student loan debt is too high, and private loans have been increasing in recent years, despite the fact that these loans are riskier than government-backed loans. What to do? Well, according to the report:
Richard Cordray, the Director of the CFPB, asks that Congress enhance the role of schools in the private student loan origination process, examine the appropriateness of the bankruptcy discharge standard, and modernize the regulatory framework to ensure a competitive, level playing field where consumers fully understand their debt obligations and lenders have appropriate data to make underwriting decisions.
Examine “the appropriateness of the bankruptcy discharge standard” means changing current rules that essentially don’t allow people to discharge any student loans in bankruptcy. So the CFBP is suggesting that it might be a good idea for people to be able to discharge private student loans if they go bankrupt.
The trouble with this suggestion, the Wall Street Journal points out, is that private student loans make up only 15 percent of outstanding student loan debt in the country. The rest of the roughly $1 trillion in debt is owned by the federal government.
So basically the federal government, which holds 85 percent of student loan debt, is suggesting that this debt is a huge problem but is recommending as a solution something that will address only a portion of the problem.
And it is, furthermore, someone else’s problem. Neal McCluskey over at CATO complains that there’s something a little off about this: “The nation’s biggest subprime student lender-your federal government!—has just called out private “subprime” lenders.”
As Hamilton Nolan at Gawker writes, “Haha the government would really like PRIVATE lenders to loosen up! But of course this shouldn’t apply to government student loans, because “it would likely result in taxpayer losses.” Poverty, like the sort engineered by a lifetime servicing debt assumed at 18, also results in “taxpayer losses,” though perhaps not on the same magnitude.
Furthermore, the document utterly fails to address how it is that the debt itself took over and how we might make real structural changes to correct that.
No doubt it would be an improvement for many Americans if citizens could discharge private student loans in bankruptcy, but it would be pretty minor improvement.
If the CFPB recognizes that student loan debt is a problem, it’s time to come up with solutions that address that problem, not 15 percent of that problem.