Saturday, June 29, 2019

Bernie Sanders wants to cancel $1.6 trillion in student debt: A bridge too far?

Senator Bernie Sanders is running for President a second time. Last week he made the news with his proposal to cancel all federal student-loan debt-- $1.6 trillion.  If Bernie makes good on this pledge, he will certainly make 45 million student-loan borrowers very happy.

Bernie also proposes to make a four-year college education tuition-free at public universities. If he can pull that off, millions of Americans will be delighted. A free college education! What's not to like?

I have supported student-loan reform for more than 20 years, and I applaud Senator Sanders for putting the student-loan crisis on the front burner of national politics. But in my view, Bernie's proposals may have gone a bridge too far.

First of all, the federal student loan program, which Congress inaugurated 50 years ago, has morphed into a giant Improvised Explosive Device (IUD). As we saw in the movie Hurt Locker, an IUD must be defused very carefully or it will blow up in our faces. No one really knows what the impact would be on the national fisc if the federal government were to write off $1.6 trillion in student-loan debt. Bernie says he will pay for this bonanza by taxing Wall Street, but that tax would fall heavily on retirees, who have most of their savings in mutual funds tied to the stock market.

Even if Bernie could cancel all student debt tomorrow, most students would still have to take out additional student loans to pay for their next semester's tuition, fees, and living expenses. Of course, Bernie's solution to that problem is to simply make a college education at a public institution tuition-free.

But let's think about Bernie's tuition-free college proposal for a moment. All public colleges receive some kind of financial support from the 50 individual states. Any plan for a tuition-free college education at a public institution must involve some coordination with 50 state governments. Is it realistic to think a Sanders administration could successfully negotiate with California, Illinois, New Jersey, and 47 other states to provide tuition-free college from sea to shining sea? I doubt it.

As for Bernie's proposal to forgive all student-loan debt, that notion seems unwise. Although it is true that millions of student-borrowers are unable to pay back their loans, some portion of the 45 million student debtors received fair value for their student-loan dollars. Do we really want to forgive student-loan debt taken out by people who attended Harvard Law School and landed high-paying jobs?

In my view, the best way to resolve the student-loan crisis is to reform the Bankruptcy Code and allow insolvent student-loan debtors to discharge their student loans through bankruptcy. People who took out student loans in good faith and cannot pay them back should get relief from their debts like any other insolvent debtor.

After all, the bankruptcy judges have the expertise and experience to determine who is entitled to bankruptcy relief from their student loans. All that needs to be done is simply to strike the "undue hardship" clause from the Bankruptcy Code.

In fact, Senator Sanders and several other presidential aspirants in Congress are co-sponsoring just such a bill. Titled the Student Borrower Bankruptcy Relief Act of 2019,  the bill has been filed in both the Senate and the House of Representatives. Rather than forgive $1.6 trillion in student debt in one fell swoop, Congress needs to pass this bill so that distressed student-loan debtors can obtain relief in bankruptcy.


Bernie Sanders: We can have our cake and eat it too!





3 comments:

  1. Well done, I completely agree. Bankruptcy carries enough moral stigma and other costs so that those who pay off their loans will not be so resentful.

    I cannot find any current estimates of how many student loan debtors would declare bankruptcy if it was easier to do. Dr Robert Lawless made some estimates in 2012. Do you have an opinion on this?

    ReplyDelete
  2. Well done, I completely agree. Bankruptcy carries enough moral stigma and other costs so that those who pay off their loans will not be so resentful.

    I cannot find any current estimates of how many student loan debtors would declare bankruptcy if it was easier to do. Dr Robert Lawless made some estimates in 2012. Do you have an opinion on this?

    ReplyDelete
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    ReplyDelete