Senator Warren to Save the Day?

Michael Lux Bankruptcy Articles, Blog, News, Student Loans 0 Comments

Senator Elizabeth Warren recently announced some fascinating proposals to fix the student loan crisis.  You may best know Senator Warren as the Harvard Law Professor who helped create the Consumer Financial Protection Bureau.  Today Senator Warren directed her focus towards addressing the trillion dollar student loan problem.  She set out several ideas that are both creative and practical.

Lets take a look at these ideas one by one…

Bankruptcy Reform

Bankruptcy from student loans has gradually been phased over the course of the last few decades.  Today, it is nearly impossible to discharge student loans via bankruptcy.  Warren’s proposal is quite simple: make private student loans eligible for bankruptcy.

This idea makes sense for a number of reasons.  First, it would provide an incentive for private lenders to work with borrowers.  Second, it would provide an opportunity for many young people to get a second chance.  As a country we have bankruptcy to provide second chances for people who buy houses they cannot afford, run up credit card debt, or have businesses that fail.  While it might be ridiculous to give a recent college grad a blank slate at no charge, their ought to be a path to bankruptcy for those that need it most.

Provide Federal Funding for State Colleges

One of the first things that colleges point to when asked about the ever increasing cost of tuition is the fact that state funding for post-secondary education is on the decline.  If the Federal Government were to provide a financial incentive for the states to put more money into education, tuition prices would decline.  Lower tuition means less student loans.  Everybody wins.

Eliminating Government Profits from Student Loans

There is some debate about the actual amount of money that the Federal Government is making on student loans.  What is not up for debate is the fact that student loans have become a source of income for the Federal Government.

Warren didn’t elaborate on how she would return these profits to students, but this just seems like the right thing to do.

Punishing Colleges with Graduates who Default

I have a feeling that this one may be the most controversial, but I think it is a really good idea.  She specifically mentioned that “schools that have a high number of graduates defaulting on their loans should pay back money to the federal government. That money could in turn be used to reward the schools that keep costs low.”

Some schools do a great job of finding employment for their grads and educating them for success in the future.  Others focus their efforts on putting students in the classroom.  Students go to college to build a better future for themselves, shouldn’t we encourage colleges to help them with this goal?

Having made a similar suggestion in a previous article, one reader astutely pointed out that he didn’t think it was fair to penalize colleges if they have grads who are not willing to pay their bills.  It is a very fair point, but I think the issue is that many students are not able to pay their student loan bills.  Colleges should be penalized if large numbers of their grads can’t afford their debt.  If school A has a 5% default rate and school B has a 40% default rate, shouldn’t we be encouraging school B to get its act together?

Earlier Aid Package Notice

Finally, Senator Warren suggested that students know exactly what there government aid package is before they start applying to schools.  This novel idea sounds like it could help out a lot of high school seniors.  Many apply to college hoping that the finances will take care of themselves after the fact.  They get into their “dream” school and end up taking out debt they cannot pay back.  If the student know before they started applying they would have a better idea of what schools were in their price range and the ones that were not.

Final Thoughts

In light of the government shutdown, this seems like an odd time to be suggesting student loan legislation.  However, the fact that Senator Warren has chosen to make it a priority is good for everyone with student loan debt.  These ideas may not ever become law, but the discussion alone has its benefits.

Readers:  What do you think?  Will these ideas ever become law?  Should they?