Write off student loans? There’s a better solution.
The pandemic has hung like a storm cloud over America for more than two years, but for some people, it has had a silver lining, or maybe gold. Since March 2020, the federal government has excused student loan recipients from both payments and accrual of interest — saving them, and costing the federal government, $200 billion so far.
President Joe Biden says he’s planning to provide additional relief to Americans burdened by student loans debts. During the campaign, he promised to cancel $10,000 for every borrower. On Wednesday, he ruled out demands to make it $50,000 but said he’s seriously considering additional help.
The problem he’s addressing is not imaginary. Some 45 million Americans owe a total of $1.6 trillion in student loans. Robert Lawless, a professor at the University of Illinois College of Law, notes that since 2006, per capita debts on credit cards and mortgages have declined slightly, in inflation-adjusted terms, while car loans have risen slightly. Meanwhile, student loan debt has more than doubled. The weight has fallen disproportionately on a generation of college graduates that was hit particularly hard by the Great Recession of 2007-09.
But the case for writing off loans across the board is weak. Many people carrying large debts have the sort of degrees and jobs that make repayment quite feasible. Many borrowers have smaller debts. Writing off loans across the board tends to be regressive, in that those with higher incomes would get an outsized share of the benefits.
There is a better option: letting borrowers discharge excessive debts through bankruptcy or some comparable procedure. That’s a remedy available for just about every other type of debt. In colonial America, people who couldn’t repay their loans could go to debtors’ prison. But the Constitution authorized Congress to enact “uniform Laws on the subject of Bankruptcies.”
These laws recognize that people and companies sometimes take on debts they ultimately cannot redeem. Bankruptcy is as American as “Little House on the Prairie.” In 2020, there were 544,463 filings, down from 774,940 in 2019.
In a society based on property rights and free markets, you might expect the stench of disgrace to be attached to those who fail to repay what they owe. But these days, bankruptcy carries about as much stigma as skipping church on Sunday.
Among the successful Americans who have legally shirked their obligations are actress Pamela Anderson, baseball star Curt Schilling, country music artist Willie Nelson and a certain former president. Six of Donald Trump’s companies have filed for protection from creditors.
Almost every major airline has gone through bankruptcy. So have Marvel Entertainment, General Motors, Eddie Bauer and Neiman Marcus. They can all invoke the wisdom of Henry David Thoreau: “Bankruptcy and repudiation are the spring-boards from which much of our civilization vaults.”
Student loan borrowers were once able to use this escape hatch. But alleged abuses prompted Congress to impose tight restrictions. Since 1998, it has been almost impossible to discharge student loans, no matter how hopeless the circumstances.
Previously, these borrowers were blocked from seeking bankruptcy protection for seven years after repayment began. That prevented cash-poor graduates with great earnings potential from cheating the system. But by making bankruptcy permanently unavailable, Congress visited misery on millions of people who deserved relief.
Allowing the orderly discharge of unpayable debts would introduce a badly needed element of mercy without showering benefits on the undeserving. Borrowers would hardly be getting off easy: Applying for a debt discharge will destroy their credit ratings and make it much harder to get loans for any purpose for years to come.
Blanket loan forgiveness “would be giving tens of billions of dollars to doctors, lawyers and MBAs,” Constantine Yannelis, an economist at the Booth School of Business at the University of Chicago, told me. Allowing bankruptcy or something similar would not: “The main difference from loan forgiveness is that it would go only to people who really need it.”
It can be argued that this solution is unfair to those who took out loans and paid them back. But the same can be said of bankruptcy laws in general, which are an accepted part of our system. When people fall too far into debt, it’s neither humane nor realistic to squeeze them into destitution.
Many people made choices about college that turned out to be financially ruinous, and our laws shouldn’t condemn them to pay the consequences forever. America, after all, is the land of second chances.