October 17, 2013

BARELY LEGAL: Government as a Solution to Student Debt Crisis? Not So fast.

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By PHUC LE

While skyrocketing tuition is indeed a problem, finding the right cure requires us to look at the bigger picture. It is no secret that rising law school tuition is part of a larger trend of increasing tuition in higher education. This is largely due to two things: 1) The backing of private loans by the government (which ended in 2010) and 2) the low interest rate on federal loans, which is possible because of subsidy.  Government-backed loans cannot be discharged in bankruptcy unless the student can show “undue hardship.” This showing requires, among other things, that the borrower is living close to the poverty line, that this state of living is likely to persist, and that he has used good faith effort to pay back the loan.  In other words, most students will not be able discharge their loans.

The consequences of these policies are predictable enough: Before 2010, private lenders, like Sallie Mae, threw caution to the wind and allowed students to borrow as much as needed. This problem has been exacerbated by the large gap between the time when students initially apply for loan and their first repayment. The prospect of beginning to pay back one’s loans four to seven years down the road is remote to young adults like us. The system that we collectively set up has allowed students to be momentarily insensitive to the actual cost of education. Faced with students who have a substantial capacity to borrow and are at least presently insensitive to price, what have colleges and universities been doing? They have, predictably, largely stopped competing in terms of cost. Instead, they have been competing by building nicer facilities and hiring more prestigious professors to draw in students. In this kind of contest, is it really surprising that student debt exceeds one trillion dollars? If the underlying problem of student loans looks similar to that of the housing bubble in 2008, that’s because it is.

Now, in a recent op-ed, Nicholas Kaasik J.D.’14 proposed government oversight of non-profit organization and activism from law students. I am afraid neither will work for two reasons. First, as mentioned above, current students have few incentives to oppose tuition increases because they mostly affect students who enter public interest work. If the rate at which Cornell increases its tuition stays at 4 percent, the resultant increase in our monthly payment is $138 over a period of five years. This is hardly a number that an average Cornell law student would fight over, especially when he or she has invested in one or two years of tuition fee. Moreover, Cornellians will overwhelmingly enter Big Law, pay off their debts and hence have even fewer reasons to stand up against tuition increases. If history informs us of any universal truth, it is that people tend to line up according to their respective interests. Most students may sign a petition protesting tuition increases, but between juggling 16 credits and summer job interviews, this will probably be the end of their activism. Second, I think the argument for government oversight is tempting, but ultimately ineffective. A single oversight body is likely to be too slow to adapt to the ingenuity of private organizations whose natural instinct requires maximizing benefits. We should not forget how private investment banks dazzled and outwitted credit rating agencies and government officials in the years leading up to 2008.

The solution lies in the problem. The problem is that our society decided to encourage people to go to colleges by artificially distorting incentives. One way to correct this is by removing part of the artificial distortion. I would recommend allowing students to discharge their debts in bankruptcy, just like any other debts. This would make private lenders more hesitant in lending out money, which in turn would put pressure on students and universities to be cost conscious.

Phuc Le is a first year in the Cornell Law School. He may be reached at pml87@cornell.edu. Barely Legal appears monthly this semester.