Debunking the Arguments Against Student Loan Reform

Michael Lux Bankruptcy, Blog, News, Student Loans 24 Comments

With student loan interest rates set to double on July 1, the student loan debate has grabbed a lot of headlines.  At this point in time both the Democrats and the Republicans seem to agree that action needs to be taken.  Unfortunately, not everyone has come to the realization that action needs to be taken.

Before I start addressing these arguments, I’d first like to point out that I am not advocating wiping student debt clean or making college free.  While those are interesting discussions to be had, my plan for student loan reform would call for much more nuanced, cost-effective changes aimed at getting the market to correct itself and running more efficiently.

Arguments Against Student Loan Reform

1) You signed the student loan agreement, you deserve the consequences.

This seems to be the go to argument for people opposed to any sort of student loan reform.  In theory, it is logical.  People signed a contract to borrow money and pay it back, and until every penny is paid back they owe that money.

One flaw in this line of thought is that student loans are not simple agreements.  Interest rates can be variable, details on repayment plans are sketchy at best, and lies are told to add dollars to the coffers of some lenders and schools.  In a world where millions of teenagers are misled about student loans being “good debt” and how college is the only way to succeed, its hard to argue that they had a meaningful choice when it comes to these student loans.

Next, we address the subject of “deserved” consequences.  It seems especially cruel that the consequences of student loans are far more harsh than any other form of debt.  If you take out a large loan to pay for a business and it fails, you can declare bankruptcy and start fresh.  Some even applaud businessmen like Donald Trump for taking advantage of bankruptcy laws on multiple occasions.  If you can’t make payments on your house, your car, or your boat, you can get back to even through bankruptcy.  While bankruptcy certainly isn’t easy and has its negative consequences, it’s much better than being stuck with debt you never will be able to pay back.  In fact, the only debt that is treated like student loans is child support.  What possible reason is there that people who tried to better themselves by getting a college education are treated the same as “dead beat dads” yet Donald Trump’s companies get to declare bankruptcy on four separate occasions?

2) Why should my tax dollars bail out a bunch of spoiled college kids?

As Americans, many of us despise freeloaders.  We are appalled by the “welfare queens”; we are disgusted when someone takes advantage of worker’s compensation; and we are outraged that we pay for prisoners to have cable when we won’t even pay for it in our own home.

The reality of student loans is much different.  Nobody would argue that someone like Colleen is trying to game the system.  There are many like her; honest Americans working hard and struggling to get by.  They are not looking for a free ride, they just want to make an honest living, and have the possibility of one day retiring.

3) As a nation, we simply cannot afford student loan reform.

Even if you don’t buy the argument that there are deserving borrowers of your tax dollars, the economics would indicate that spending tax dollars to address this debt is better in the long run.  There is ample evidence to suggest that student loans could have us spiraling deeper into recession.  Regardless of the end result of the student loan crisis, there can be no debate that millions of Americans are delaying the purchase of a house or new car because of student loans.  This stagnates the economy and hurts everyone.  In the current recession we have all learned how a deflated housing market hurts everyone.  People who want to get a fair price for their homes should be among the biggest supporters for student loan reform.

4) I paid for my education, it’s not fair for others to get student loan help.

If there is one lesson that everyone who has struggled with student loans has learned, it is that life is not fair.  Whether you paid for college with your own salary or with scholarships, this is an accomplishment that can never be taken away.  And while it may seem that student loan reform is letting others off the hook, the reality is that no matter what happens they will still be making great sacrifices.  Graduating without debt is a tremendous feat, but its no reason to inflict decades of debt and despair upon others.

The Argument I Can’t Refute

In my research for this article, I reached out to a number of people on Facebook asking about their reasons or reasons they had heard in opposition to student loan reform.  They were incredibly helpful, but much to my dismay, I got one argument against reform that I cannot refute.  As a lawyer and someone with expertise on student loans, I thought I could dispute anything that came my way.  I’m ashamed to say I have no argument to this one reason to keep the law exactly as is:

The government, schools, lobbyists, and lenders all benefit financially from the current system.

If there were major changes to student loan laws, tuition might have to come down to reasonable levels.  Schools would not want this, especially those of the for-profit variety.  If there were major changes to the student loan laws, lending might have to be done responsibly.  Banks and companies like Sallie Mae would not want this.  If there were major changes to the student loan laws, the government might not be making $51 Billion a year on student loans.

In the United States, people owe over a trillion dollars in student loan debt.  With this much money changing hands, many people are getting rich.  It should come as no surprise that many rich people do not want the student loan laws to change.  Therefore, changing them in a meaningful way will be very difficult.

How do you feel about student loan reform?  Do you agree with my arguments or am I wrong?

  • While you make good points some I disagree with. I have a son and we all already discussing college before he is even in high school. We are advising him to stay at home and go to a two year college and not have to worry about paying anything. If he chooses to go to UNC on loans then we don’t feel its fair he come complaining about owing money later.

    Plus there are some people I truly feel for and think need the reform but not all. You have people who graduated and are driving nice cars, live in nice homes and still are complaining about the loans. The car they bought could have paid off the loan debt. This isn’t the case with everyone but there are a lot. Even if you graduate making 30k you can make choices that will allow you to pay the loans back.

    I do agree that the reasons they probably wont change is because of the point certain people are just making too much money. And I think this should be added to bankruptcy I just don’t agree with certain aspects of the reform.

    • I commend you for educating your son on the variety of college education options available. We definitely need more knowledgeable consumers in the market.

      In response to your second paragraph, I disagree with your point about people living in nice homes and complaining about student loans. First of all, nice things or not, if they have been misled, they have a right to complain about their student loans. Secondly, the fact that some people are able to afford such things does not mean there should not be student loan reform. Even if there are people who don’t deserve help, there are many who do deserve it. We need to craft legislation for those in need. It misstates the facts to say that because certain people are doing fine, they must be all doing fine.

      I’m curious, what aspects of the reform do you not support?

      Thanks for stopping by and good luck to you and your son as you prepare him for college!

    • Hi Michael its not that I dont support the reform I just don’t think that a lot of the people crying foul actually deserve the break the reform would give them thats all. Its like unemployment (not the same) but as an example there are people who truly need it and deserve it but there are a lot of people who really abuse it.

    • That is a great example. Like any government program there will be people who try to take advantage of it. We should have no tolerance for the people who try to cheat the system. However, just because cheaters will inevitably exist doesn’t mean that we should ignore the problems of the many who deserve and need help.

    • Chris

      My problem isn’t with the loans and they won’t be forgiven! (People need to stop thinking it’s going to be a FREEBIE -NOT! If you actually go in and apply you will find that VERY FEW people are getting loans totally forgiven. You have to meet with strict criteria – (Teacher Loan Forgiveness) If you are applying for Public Loan Forgiveness – you will end up paying the bulk back, but some will be forgiven at end, definitely worth it – regardless.

      My issue is with unfair practices AND high interest rates! I can get a car loan for 2 percent and a mortgage for 3 BUT I can’t pay off my education at the same low rates!!! BULL!! The CEO of Sallie Mae bought a baseball team! Ridiculous! Most of the people I know WANT to pay off their HIGH RATE loans but are clearly getting ripped of with interest rates.. My son had one as a freshmen for 3.75 by the time he was a senior and he was ready to get out they jacked the interest rate to 12 percent!! Unfair practices..

      Bottom line ~ make it fair and reasonable, so that we an PAY THEM OFF!

    • Chris, you are definitely in the majority on that one. Student Loans are almost never discharged in bankruptcy yet they have really high interest rates. Where is the logic in that?

  • I actually do know people who feel they are entitled to have their loans forgiven…because…you know….they deserve it or something. I think that more education needs to be done up front so that people aren’t taking out so many massive loans in the first place.

    • I think that is best solution. If everybody knew what they were getting themselves into, we wouldn’t have this problem. The issue is that we are trying to alter beliefs that have been closely held for generations.

  • I don’t think we need student loan reform as much as education reform. Around the world, our students are being out educated and out performed by students going to free universities. If we really want to fix the economy in the long run, that’s the way to do it. And student loans would magically go away.

    • That is a very interesting theory. Do you think free education means a better educated population?

  • I approach student loan reform from a moral standpoint. The mind and the body are intrinsic qualities that everyone possesses. What moral right does anyone have to impose massive debts on someone if they seek to improve their mind or their health? If these intrinsic qualities are not improved then the person possessing them becomes sick and ignorant – conditions that ought not be imposed upon anyone. Furthermore, unlike extrinsic material goods, these intrinsic qualities cannot be repossessed if the debtor cannot pay. So many other countries have universal health care and free (or very low) tuition – they recognize that nobody should go into debt to improve their fundamental properties.

    • That is an interesting point of view. I think there is certainly no debating the fact that the nation benefits from a well educated population.

  • I am among those who were misled into getting student loans. None of the local schools had the degree I wanted, so I chose a for-profit. Let me tell you: It was a horrible mistake! Instructors who claimed to have degrees that qualified them to teach were no better than glorified babysitters! They did not teach! They had only to keep students from being inappropriate on the discussion boards. I was so horrifically disappointed that I shocked a local senator when I shared my story with him. He tried complaining to the Department of Education on my behalf and they said to complain to the school’s accrediting agency – this was done, but it didn’t do anything to solve the problem.
    The school I chose has been cited by the government as one of the worst for-profits in the country – wish I’d known that before I went there! Instead, I was a young, starry-eyed dreamer as so many fellow students are who was blinded by the constant barrage of “get a college degree, get a better job, live the American Dream!” Some dream! Thousands in debt for a defective education!! They said federal financial aid would cover most of the cost – what a big, FAT LIE! I was so horrifically misled that I WANT A REFUND!
    I feel the school should pay back the loans they made me take out because I’m most certainly NOT satisfied with what they did! It certainly was not an education!
    If education is to be treated as a commodity like a TV or car, I should be able to get a refund for it being defective, like a TV or a car!
    I agree most strongly with a suggestion made in a federal hearing a couple years back: adopt a system much like Germany’s. The government pays for EVERYTHING for college – books, dorm, tuition, food (odds are they track expenses carefully) – and once you get a job IN YOUR FIELD (for example, a fashion designer getting a job with a fashion design company) you begin paying back 10% of your income for 10 years as long as you have the job. The result is highly prestigious schools and a very educated population. The government keeps a very sharp eye on their schools for the benefit of the students.

    • The German plan sounds very similar to HR 1330 as proposed by Rep. Karen Bass. She wants to create 10/10 plan.

    • James Robert

      This is EXACTLY the argument I make to people. If you ordered a steak and it wasn’t cooked the way you wanted it, you would send it back until it’s what you want, or demand a refund. If colleges and universities today want to run themselves like businesses by competing with one another (often through wasteful spending) then we should treat them like businesses.

  • I’m not that familiar with the German system but I think there is tracking of the students where they are placed into different groups/curriculum based on their abilities. I’m not sure a lot of parents would go for that here. Though I do see some validity to it. I’m sorry but there are plenty of students who have no business going to college. They are just there because it is a natural continuation of high school. And I know some may disagree but there are so many majors that are really unnecesary and will not help you get a job.
    The “Argument You Can’t Refute” is distressing, there really are a lot of groups that are benefiting from the current system and have no incentive to change it.

    • I think there are certainly plenty of people out there who will admit they had no business going to college and regret going. However, I’m not sure I can get behind the idea of the government restricting who gets to go to college. To me, college is an opportunity that everyone should have access too. The high prices and terrible student loan rules are one thing that stands in the way of that opportunity. I wouldn’t want to replace it with another system that also limits opportunity.

  • I find it fair that people have to repay their student loans. Rarely are they for tuition only, so the choices you make while being a student, that is not to work, not to repay early, to pay for a place, a car, beers instead of living with your parents and staying in, and most importantly, to go in debt for a major you know will never pay out, shouldn’t be absolved by an easy bankruptcy. Now the problem should be taken from the root, not letting students borrow more than what they realistically will be able to repay. You shouldn’t go $200K in debt for an art degree, but if a financial institution pushed those loans on you, they may be partly responsible. I like the UK system where loans are funded by the government at a low rate, and depending on your starting salary, a portion of your paycheck automatically goes to repayments. You can overpay but they make sure you at least pay a minimum. If you want more than the government loan, it is a normal consumer loan so you can choose bankruptcy.

    • I definitely think things like school and major should be considered when loans are given out. Right now people are getting loans they have almost no real shot at paying back. This needs to change.

    • James Robert

      We would need to address the opaque nature of higher ed institutions marketing their promotional materials to unsuspecting students looking to quickly decide where to go off to school after graduating high school. Colleges (private institutions notably) are often reluctant to share meaningful data pertaining to job outooks by major, which would be related to how the loans for each degree are calculated. In other words, if we wanted to try and pass legislation like that (which I agree with), we’d better be prepared for colleges to lobby against it. I say let the colleges fail if they can’t teach a quality education that would prepare students to be in positions to pay back their loans.

  • Tara

    I don’t want loan forgiveness on my loans, I just want an interest reduction. My federal graduate school loans are at 6.55% and that can’t change. I pay my loan payment every month on time and have three years of payment history behind me. If the government offered a refinancing for those federal grad school loans to reduce the interest rate significantly (to 4% or below), I would be able to pay my principal off faster! But then the federal government and their loan servicers (MyFedLoan is mine) wouldn’t be making any money….

    • It really does suck that everyone seems to be able to lock in lower interest rates except for those of us with student loans. We literally need an act of Congress to do it.

  • You make an interesting point when you say that the only type of debt in bankruptcy that is treated like student loans is child support. While not technically true (some forms of debt in addition to child support cannot be discharged, period), it brought to mind that student loan debt is even treated more severely than income tax debt. Usually tax debt is the worst type of debt to have, but even income tax debt can be discharged if enough time has passed and a few other conditions exist. In contrast, student loans are treated as harshly in bankruptcy as criminal restitution orders!

    • The treatment of student loans in bankruptcy is absurd. Great points!