Congress & DOE Can't Fix the Student Loan Program: They're Just Making It Up As They Go Along

 Paolo Bacigalupi's apocalyptic novel The Water Knife is a tale about the struggle for water in the desert Southwest. Lucy, one of the novel's lead characters, is an investigative reporter trying to understand the major power players who use the law, violence, and vigilantes to control water for their various constituencies.

At some point, Lucy realizes that none of the big players has a long-range strategy, and she has a revelation: 

They have no idea what they're doing. These are the people who are supposed to be pulling the strings, and they're making it up as they go along.

Suppose you are a college-loan borrower who hopes Congress will reform the federal student-loan program and maybe even forgive all $1.8 trillion in outstanding student debt. In that case, you need to have the same revelation that enlightened Lucy.

All the major players who participate in the massive grift called the federal student loan program are just making it up as they go along. There is no long-range plan. In fact, I don't think Congress or the Department of Education even know for sure how much money has been borrowed.

Reporters Warren Rojas and Camila DeChalus, writing for Business Insider, recently reported that 360 high-ranking congressional staffers owe money on student loans. Almost fifty of those staffers owe more than a quarter-million dollars. More than 250 of them owe up to $100,000. One congressional aide has been paying on student loans for 32 years.

Many of these staffers hope President Biden will cancel all this debt before the November elections, fearing the prospect of a Republican-controlled Congress. They may think the Biden administration has a plan.

But I don't think so. I don't think any of the leading players have a plan.

Four thousand colleges and universities depend on getting regular infusions of federal student-aid money.  They're like drug addicts who live from moment to moment, waiting on their next fix.

The people who run the for-profit colleges are getting rich, and so are their shareholders. The status quo works just fine for them.

The Department of Education bureaucrats are paper shufflers.  Their only goal is to keep shuffling all that paper until they're eligible to retire.

Rojas and DeChalus reported that four dozen student-debt-related bills have been introduced in this session of Congress. But so what? Reform bills have been filed every year for more than a decade, but none of those bills has made it out of committee.

The student-debt strikers hope to put enough pressure on Congress to get significant relief on their massive student loans. I hope they're successful. But I'm not sure the strikers have even gotten Congress's attention.

Let's face it. Congress, DOE, and the universities don't have a long-term plan for solving the student-loan crisis. They're just making it up as they go along. 

Making it up as they go along

A student-debt strike to pressure Congress for wholesale student-loan forgiveness simply won't work

Student Debt Strike, an online Reddit community, advocates for a mass student-debt strike as the best way to pressure Congress to grant wholesale student-loan forgiveness.  I totally support this group's goals.

Economist Stephanie Kelton and others have argued persuasively that forgiving all federal student-loan debt would stimulate the economy. Relieved of burdensome student loans, more than forty million Americans would be free to buy homes, start families, and save for their retirement. 

Furthermore, I agree with Professor Kelton, who believes the federal government can handle massive student-loan forgiveness without wrecking the economy. The feds can simply select one of its many accounting gimmicks to absorb the loss, much as it dealt with the savings-and-loan crisis in the 1980s, the real-estate turmoil of 2008, and Puerto Rico's bankruptcy.  

After all, $1.7 trillion in outstanding student-loan debt is peanuts to a nation with a federal deficit that tops $30 trillion. What's $1.7 trillion among friends?

Nevertheless, it is dangerous for people to participate in a student-loan strike by refusing to make their monthly loan payments.

First, defaulting on a student loan is catastrophic for the individual debtor. Interest and penalties add up and get added to the loan balance. Over time, a student-loan defaulter's loan balance can double, triple, and even quadruple.

Moreover, student-loan defaulters rarely get free of student-loan debt in bankruptcy.  Congress inserted the "undue hardship" rule into the Bankruptcy Code to discourage bankruptcy relief. Many bankruptcy judges interpret "undue hardship" quite harshly and refuse to discharge student debt even when the debtor is in desperate circumstances.

Secondly, I do not believe a student-loan strike will have the desired effect on Congress. Thus far, Congress has shown little appetite for reforming the federal student loan program. Political pressure from the higher education industry (including the for-profit colleges) has blocked reform.

Besides, a significant percentage of college borrowers are already on strike because they have defaulted on their student loans. In a 2018 report, the Brookings Institution calculated that 40 percent of student borrowers may ultimately default on their student-loan obligations. If that is not a strike, I don't know what is.

If I thought a student-debt strike had any chance of succeeding, I would support it 100 percent. But I'm afraid strikers will simply be labeled as deadbeats without moving the needle on reform or loan forgiveness.

Much as I hate to admit it, I think the best option for an overburdened college-loan debtor is to sign up for the most generous income-based repayment plan that is available.

Someday, the student-loan crisis will become so massive and so scandalous that Congress will be forced to act--either by canceling all student debt or easing the path to bankruptcy relief. 

Unfortunately, I think that day is a long way off.