Obama Swings and Misses Again on Student Loans

Michael Lux Blog, News, Student Loans 12 Comments

Earlier this week President Obama announced his plan for making college more affordable.  While I love the fact that President Obama’s solution uses some of the very same ideas I proposed in June, his new plan does not go far enough.  First, no aspect of his new plan encourages more responsible lending.  Second, it does not address the existing trillion dollars in current student loan debt.

Problems aside, the President’s newest proposal is a step forward.  It is also a relief to know that he has not ignored the student loan crisis in the wake of the passage of the new student loan interest rates law.

What is the newest proposal?

The President hopes to create a comprehensive rating system for all colleges.

In his words:

“We need to rate colleges on who’s offering the best value so students and taxpayers can get a bigger bang for their buck.”

The idea here is to allow students to make a more informed decision when it comes to picking a college.  This is certainly a reasonable goal and a necessary one.  Many college have been the subject of lawsuits by former students who alleged that the schools inflated employment statistics.  The theory is that if students have a better idea of the value of the education, they will be better consumers.

The President’s rating system would include the following statistics

  • Average tuition
  • Average loan debt
  • Earning after graduation

By 2015, we may see more detailed numbers and complex information, but the general idea is in place.  With better information, students can make better decisions.

The Flaw in the Plan

Unfortunately, the government making statistics available and the 18 to 25 year old population being aware of these statistics are two very different things.  Think about all the catchy commercials that many colleges in your area run.  How are statisticians with the Department of Education going to compete with million dollar advertising campaigns?  Moreover, the general population of this country still operates on the mistaken assumption that student loan debt is good debt.  Government statistics are not going to change the minds of the masses.

Some colleges are very good at misleading potential students.  Even if the President’s proposal was to be fully enacted exactly as he wanted, schools would still have every incentive to continue to deceive students to encourage attendance.  Lenders will still profit from student loans, and companies will still get rich.

A Necessary Tweak

To make a meaningful difference in student loan lending, the President needs to create a system in which lenders are encouraged to lend responsibly.  The mortgage crisis taught us what happens when there are no repercussions to irresponsible lending.  Why do car companies and credit card companies lend in a more responsible manner?  Because if they give money to someone who has no shot at paying it back, they lose their investment to bankruptcy.  The student loan laws have almost no bankruptcy protection for borrowers.  Lenders have no reason to act responsibly.

If the President’s plan were to be combined with meaningful access to bankruptcy protection for borrowers, things would improve.  Student loan lenders are in a far better position than a bunch of 18 year olds when it comes to accessing the quality of a college and the “bang for the buck.”  If they had a reason to act responsibly, and access to the statistics the President wants to make available, we might be on our way to a solution.

Then all that would be left would be the trillion dollar elephant in the room.

Readers:  What do you think?  If you had access to more accurate employment and debt statistics, would it have affected your college decision?