Student Loans and Bankruptcy
By Bryan Caplan
One of the main things I learned while writing The Case Against Education: Contrary to almost everyone, student loans are virtually the least objectionable government subsidy for college. Why? As you know, I firmly subscribe to the view that – from a social point of view – Americans spend far too long in school. Student loans are benign because they do almost nothing to increase schooling.
The key facts I learned:
1. While the federal government originates over a hundred billion dollars worth of loans each year, most of the loan is not a subsidy. The highest-quality estimate of the average 2010-2020 subsidy is 12% of the face value of the loan. Not 12-percentage points per year, mind you, but 12% of the face value total. On an annual basis, that’s 4% of all government subsidies for higher education. In 2011, that comes to merely $13 billion a year.
2. Contrary to the credit market imperfections story, loan subsidies have about as much effect per dollar on college attendance as tuition cuts. The reason, on reflection, is pretty obvious: “Giving” people money for tuition isn’t very motivating if they know they’ll eventually have to repay what they received. Loan subsidies sweeten the deal, but knowing you’ll effectively have to repay 88% of what you borrow is only slightly more enticing than knowing you’ll have to repay 100% of what you borrow.
But isn’t it awful that student loans survive bankruptcy? It’s definitely awful for unemployed college graduates – and even worse for dropouts. For society, however, it’s for the best. If borrowers could escape student debt via bankruptcy, taxpayers would make up the difference. This would probably substantially raise the implicit loan subsidy. And if I’m right about the social value of education, that’s bad.
Still, as long as policy-makers ignore all the complaining about social loans and bankruptcy, the complaining serves a useful social function. I strongly suspect that few 18-year-olds fully realize how hard it is to weasel out of their student loans. The more often they hear pundits moan, “You can’t escape student loans with bankruptcy! How terrible!” the scarier borrowing gets – and the less likely kids are to borrow or attend.
It’s great that education reformers are talking about student loans and bankruptcy. Our goal, however, should not be to change bankruptcy law, but to publicize it.