February 21, 2014
Debt collectors are gorging themselves on student loans
And until DC gets its act together, they can't be stopped
The cost of college is skyrocketing. The labor market is atrocious. Employers demand a college degree for pretty much any job these days. Yes, at this point, it has become commonplace to note the crushing burden of college debt (the total amount of which is now something like $1.2 trillion). But there's another side to this story that hasn't gotten as much play: the implications for debt collection.
Debt delinquency exploded during the financial crisis, but has since steadily decreased for every type of debt — except that of students. Because the bankruptcy code is badly skewed when it comes to student loans, total debt collection has risen steadily. Students are now the fuel for one of America's more predatory agencies, which is saying a lot.
Here's how it happened, and what we might do about it.
Kevin Drum posted these two amazing charts recently from the New York Fed report on household debt. Here is the percent of each kind of debt that is delinquent. Just look at what's happening to student debt compared to the others:
And here's total debt collection:
Look at the first chart: Delinquency has fallen sharply since 2009 for everything but student debt. Now, look at the second: Total collection is actually up overall, a trend that must be driven in part by the similar increase in student debt.
This jibes with the fact that student debt is treated much more harshly than almost any other kind in the bankruptcy code. It's nearly impossible to discharge during a typical bankruptcy proceeding — it took one guy 10 years in court to get his law school loans partially discharged in such a situation. And student debt can follow people to the grave and beyond, making it closer to indentured servitude than a regular loan. (Though at least we aren't putting broke students into our shiny new system of debtor's prisons — yet.) There's no reason for this discrepancy, of course, it's just a dumb policy from decades ago that now can't be changed because of Congressional gridlock.
That horrible policy, plus the ever-increasing pile of student debt, plus a college degree's outsized role in landing a good job, has created a golden opportunity for amoral collection agencies to make vast sums hounding people who tried their luck with college and didn't make it, for whatever reason.
There has been a bit of progress here and there on this problem. Last year the federal government announced it would stop actively incentivizing atrocious behavior on the part of collectors it employs, and Kirsten Gillibrand has a bill which would allow students to refinance their debt at 4 percent interest if they've got a higher rate.
These are positive developments, but there's really no reason we shouldn't be considering some more fundamental changes to the education finance system. Student loan debt obviously ought to be dischargeable in bankruptcy, just for starters, and we ought to put pressure on the rankings and prestige systems that cause colleges to jack up prices for no obvious benefit to the student. And shoot, why not try mass debt forgiveness, so long as we're thinking boldly? If Wall Street got a do-over after the financial crisis, seems fair for America's struggling students.
Furthermore, why use debt to finance education subsidies in the first place? As with many policy objectives, America has traditionally pushed education subsides through loans and tax incentives, because that allows us to pretend like we aren't spending money when we really are. We should be wary of schools using subsidies to just hike prices and hire a slew of pointless administrators, but to the extent that education is subsidized, we ought to be doing it with straight cash transfers rather than loans, which would be clearer, fairer, and avoid crippling graduates with debt.
In any case, all that is almost certainly impossible for the time being. But as we've seen, debt collection isn't going away, and if any sort of reform ever becomes politically feasible, we ought to aim high rather than tinkering around the edges.
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