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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, October 31, 2011

Should Law Schools Be Made Liable for the Unpaid Loans of Law Students?

New York Post op-ed, Screw U.: Government Inflated the College Loan Bubble, but Obama Isn’t Fixing It, by Glenn Harlan Reynolds (Tennessee):

It’s officially a crisis. Student loan debt has hit the $1 trillion mark, exceeding Americans’ total credit card indebtedness. Unemployed graduates with huge loan balances are camping out in “Occupy” camps -- the Hoovervilles of our age -- around the nation. And President Obama, perhaps afraid those camps will be dubbed “Obamavilles,” as indeed they have already been by some, has unveiled a new proposal that promises to help graduates who are drowning in debt.

Unfortunately, “promises” is the correct word. Though unveiled with much fanfare, the Obama proposal doesn’t really do much. First, as the Chronicle of Higher Education pointed out in an article characterizing it as mostly political, “The benefit is available only to current students. Those jobless college graduates who are protesting on Wall Street and at similar events elsewhere won’t qualify.” Second, even for those who do qualify, the benefit doesn’t amount to much. Daniel Indiviglio of The Atlantic Monthly calculated that the president’s plan will save the average grad less than $10 a month....

For serious student-loan reform, we’re going to have to look well beyond the Obama proposal. We need something that aligns incentives with reality. Here’s my proposal:

I think we should return to the days when student loans were dischargeable in bankruptcy, starting five years after graduation. This will allow graduates who are unable to pay to get out from under what is otherwise a potential lifetime of debt-slavery. If you buy a house to flip, and wind up losing your shirt, we let you go bankrupt, take a credit-rating hit, and scrub the debt away. Why should graduates be forbidden from doing the same? The five-year delay means that you can’t use immediate post-graduation poverty as an excuse (as some medical students used to do), but still provides an out.

But the real incentive-alignment part is this: Put the institutions who issued the degrees on the hook for the money they received. Making them eat the entire loan balance would probably bankrupt a lot of colleges (though that should tell us something about the problem right there), but sticking them with even a small fraction -- say, 10% or 15% -- would be enough to inspire a much greater degree of concern for how much debt students take on while in school, and for how likely they are to find gainful employment after graduation. One way or another, the higher education bubble is going to deflate. Better that it should do so without crushing the students it was supposed to benefit -- or the taxpayer.

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Talk about the nuclear option. If the schools had to make up the difference when students defer/IBR/default, a lot of schools would go bankrupt overnight.

Posted by: anon | Oct 31, 2011 12:16:13 PM

You are right, there is definitely a higher education bubble, and it will pop eventually. The problem we are facing now is, how can we best prepare for that and minimize the effects? I think allowing the debt to go away in bankruptcy might actually be a good thing. It will make interest rates go higher on the loans, which will make people think harder about the value of a college education, which, many will find is not justifiable.

Posted by: Kyle Ambrosas | Oct 31, 2011 2:05:09 PM

Where is the like button? I would be occupying wall street right now if I didn't work 16 hours a day to remain a debt slave and I got plenty of scholarships and grants.

Posted by: RG | Oct 31, 2011 7:53:29 PM

Just like bankers and other fiancers have to keep skin in the game, so should educational institutions.

Posted by: BNS | Nov 1, 2011 4:08:32 PM