The oncoming student debt crisis.

Lately, there has been a lot of noise on the internet regarding student debt. In a recent post on Forbes magazine's website, there are more than 44 million borrowers who collectively owe $1.5 trillion in student loan debt in the U.S. alone. Student loan debt is now the second highest consumer debt category - behind only mortgage debt - and higher than both credit cards and auto loans. Borrowers in the Class of 2017, on average, owe $28,650, according to the Institute for College Access and Success.  Given that too many people have borrowed too much money that they can't afford to pay back, it got me thinking about student loans, the debt that these students owe, and how to deal with this mountain of debt.

As I see it, the problem with student loan debt is:

1. It was guaranteed by the government.
2. It could not be discharged in bankruptcy.
3. It was issued without regard to whether a borrower's education would result in a job that could pay off the loan. 
4. It was a demand side education subsidy, and not a supply side subsidy. 
5. It was a major commitment made by people usually too young to understand the nature of that commitment.

Contrast issues #1, #2 & #3 with car loans and mortgages. These loans are secured by property, they can be discharged in bankruptcy, and the person's ability to pay is factored into whether the loan is issued or not. Given that the price of an education is in the same league as both a car loan and mortgage, shouldn't similar lender and borrower protections and privileges be in place? Why should the government be guaranteeing the loan and not allowing it to be discharged in bankruptcy?

Economics 101 says that if you want prices to go up, increase demand by throwing money at the consumption side of the equation. By making more money available for education without expanding the supply of "top tier" schools, students will either pay more for the same education, or buy an education of dubious quality. This is evidenced by the inflation of prices charged by good schools for an education, and the proliferation of scam, for-profit schools providing poor quality education to people who couldn't qualify to get into the good schools.

Lastly, with issue #5, we expect young adults, who are barely 18 at the time, to make the most important economic decision of their lives without much of a safety net (see issue #2 & #3). We keep the same student from buying a drink in the USA until s/he is 21. And having one underage drink is less of a life changing decision than choosing a school and borrowing the money to pay for the education.

I suggest to fix this problem, we need to do the following:

1. Eliminate government student loan guarantees.
2. Allow all student loan debts to be discharged in bankruptcy. 
3. Require that all lenders perform an analysis of whether the student's school and field of study will result in a job which allows the student to comfortably pay off the loan. They will be the risk holders, so the banks should have the right to determine who gets their loans.
4. Government subsidies to education should only be towards the expansion of the school system and for the development of new, highly qualified teachers for that system.
5. Require young adults to work for 2-3 years before applying for a student loan. These loans should not be issued to people under 21 years old.
6. Minimum standards for all schools must be set by a non-profit entity, and no student loans be issued to institutions not meeting this criteria. Graduation rates and Job Placement rates must be set high enough, so that scam, for-profit schools can not make money off of student loans.

This is a start for a longer thought experiment. But it applies real world, market principles to fix the system. However, it doesn't address what is needed for the students who have been victimized by the present dysfunctional system. For them, immediately addressing issues #1 and #2 should move things forward towards a market based system of funding higher education.

But how do we chip away at this mountain of debt incurred prior to making the above fixes without giving students a "free ride?"  Just letting existing borrowers go into bankruptcy to clear this mountain of debt can have unintended consequences.  I propose the following changes:

1. Student loan debt incurred prior to the enaction of these changes will be converted into inflation indexed, interest free loans. 
2. These loans will be paid by a separate income tax whose rate mirrors the current employee social security contribution (currently 7.5% of income), but with no upper income cap.
3. These loans will have a life span of no longer than 25 years.  If they are not paid off in full, the Federal government absorbs all losses.
4. A special inheritance tax of 10% will be imposed on all estates where the restructured loans have not been repaid out of former student incomes.  Appropriate legislation may be added to deal with legatee hardship, such as medical bills.

I have not defined all the issues needed to resolve the problems caused by our current student loan crisis.  However, this is a start - which is more than the legislative and executive branches of the Federal government have done lately....