Via Robert Shibley, who has an elegant solution to the problem: “1. Capitalize the schools to loan enough money for 4 years of student loans. 2. No selling the loan notes – let them loan the money and collect it. The end. What do you wanna bet that college suddenly gets rigorous and cheap?”
I’d take that bet.
The simplest solution is to eliminate the government guarantee to bondholders, and allow the loans to be fully dischargeable in bankruptcy. With no government backstop and the ability to discharge the debt, bondholders would demand yields commensurate to the risk. Interest rates would invariably be much, much higher unless borrowers had a credit worthy co-signer.
Once you establish the precedent that you’re happy to give the colleges huge sums of money, why would they believe it’s a one-time thing? Banks didn’t get more careful after a bail out.
Discharge in bankruptcy was the previous setup, but prone to abuse. 1) Rack up college debt — especially law/medicine. 2) Declare bankruptcy ASAP. 3) Profit!
Only if the schools have skin — significant, e.g. 40+% of debt incurred by their students — in the game should there be the option for personal declaration of bankruptcy. And for current loans — before the 40+% rule goes into effect — the government should file a lien on the college’s property to that percentage.
Schools are not the source of the student loan problem. The government guarantees the principal and interest on the bonds which are the source for the loans. The bondholders currently get a free ride, at taxpayer expense, and the borrowers get way below market interest rates, given their dubious credit worthiness. The free ride for the bondholders is the problem. Without the government guarantee on the bonds, the bonds would be rated as junk, lower than credit card debt with interest rates to match. The other part is the inability to discharge the debt. That is the second reason the terms are so easy for the borrower. If you make the borrower pay the correct interest rate, for the risk, and you make the bondholder eat the losses, when the debt is written off, there would not be a student loan problem.
If schools became responsible for the loans, the admin staff would double – with collection agents.
I paid my own way through college. I worked.
I’m not inclined to volunteer for child support.