by David Moon
The perverse irony was inescapable. A March 24 federal court ruling allowed a former law school student to discharge a student loan in bankruptcy—on the same day the US Department of Education disclosing that barely half of all outstanding student loans are being repaid according to their terms.
Student loans are generally non-cancellable, even in the event of bankruptcy.
Excluding loans to currently enrolled students and those within the six-month post-graduate grace period, barely half of the $855 billion of outstanding direct student loans are being repaid. (Federally guaranteed private sector loans bring the total to more than $1 trillion.) On a percentage basis, non-performing student loans are almost five times worse than the rate of seriously delinquent mortgages in 2009, the height of the mortgage crisis. In dollar terms, non-performing private and public student-loan debt is approximately half of the dollar amount of the 2009 delinquent mortgages.
This is not a small problem.
The social tide is turning to favor some degree (or complete) absolution of this debt. For a presidential candidate to secure the 18-to-25 year old vote, he must only promise to make college, among other things, free.
Traditional federal student loans have long been excluded from the categories of debt that can be cancelled in a personal bankruptcy. The specific loan recently ruled cancellable by a New York US Bankruptcy Court judge was a “bar-exam loan.” Because this type of loan differs from a traditional, undergraduate tuition federal student loan the ruling does not automatically set a precedent for thousands of underemployed 28-year-olds who are upside down on their school loans.
But it does, in the words of the winning plaintiff’s attorney in the New York case, “start to chip away at the absolute immunity of student loans from bankruptcy.”
In the state of Tennessee, 60% of all university graduates leave school with a loan. The average loan amount has increased 51% in the past ten years, despite a decline in average starting wages and a shrinking differential between the wages of college graduates and non-graduates.
It is not a coincidence that the two categories of largest and fastest growing large consumer expenditures are college education and healthcare—two areas where the true cost of the service is obfuscated and consumers historically pay a fraction of the actual cost at the time of the transaction.
From a borrower’s standpoint, anything to relieve this overwhelming debt burden is an outstanding development for his or her short-term cash flow. But it is horrible public policy. Whether or not the purchase of college’s instruction was a wise financial decision is irrelevant. When someone has agreed to the terms of a transaction they later regret, we do them, and society, a disservice by offering a trillion-dollar mulligan.
David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).