Wednesday, December 21, 2011

Should Student Loans Be Forgiven?

     A recent Intelligence Squared debate concerned the notion: Do too many people go to college?  The debate mentioned how student loans are not forgiven, so if a student accrues $100,000 in student loans and goes bankrupt he still must pay back the loans.
     I understand why.  Default on a house, and the bank can at least take ownership of the house and sell it.  Go bankrupt with student loans and there is nothing for the government to take and sell.  There is no collateral, of sorts.
     What if, out of empathy for struggling college graduates, we began forgiving student loan debt if individuals go bankrupt?  Would this help students?
    Some, but not others.  Because debt can be forgiven the profitability of the loans (at the old interest rate) wanes.  With banks / governments less interested in making loans, interest rates will rise to compensate for the greater default risk.  Otherwise there will be an excess demand for loans (which in could be addressed by restricting loans to only the best students, but that may not be politically feasible, and I assume it is not).  Now, instead of punishing the students who cannot translate a degree into a decent salary, you are punishing everyone who takes student loans by making everyone pay a higher interest rate.
    Are the banks / governments better off?  On the one hand, they get a higher interest rate.  On the other hand, some people default and never pay back their loans.

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