You Don't Owe That
An Obama proposal would make it easier not to repay student loans.
The Wall Street Journal
July 23, 2012, 7:17 p.m. ET
http://online.wsj.com/article/SB10000872396390444330904577539263257191398.html?mod=WSJ_Opinion_LEADTop
If only President Obama would treat America's small business owners as well as he treats delinquent borrowers, the U.S. economy might have a fighting chance at robust growth.
We'll have to wait until Friday to see how slowly the U.S. economy expanded in the second quarter. But today Team Obama will tell Congress about its latest proposals to spread the wealth around—specifically from private lenders to the people who owe them money on student loans. The goal is to create new ways for borrowers to avoid repayment.
Having recently forced taxpayers to underwrite a series of such measures for loans issued by the government, the White House now wants the shareholders of financial companies to suffer even more when private loans go bust.
Not that there are many private loans left after Mr. Obama and Congressional Democrats seized control of this market with legislation that passed along with ObamaCare in 2010. With roughly $1 trillion in student loans outstanding, close to $900 billion are federal loans, and Uncle Sugar is responsible for more than 90% of recent loan originations. But the existence of a market sliver still occupied by private enterprise gives politicians a handy industry to blame for mounting troubles in a government-dominated business.
Even though nearly 90% of defaults are occurring on loans backed by the taxpayer, last week the Consumer Financial Protection Bureau rolled out a new report on purported flaws in the private market. To underline the absurdity of focusing on private loans, the White House's own budget is forecasting default rates above 20% on some types of federal loans issued in fiscal 2013. That means defaults could be in the titanic range above $20 billion. All of the private firms probably won't issue half that amount in total loans, never mind bad loans.
The new report says that Congress should consider letting borrowers discharge their private student loans through bankruptcy. This would reverse a hard lesson learned during the 1970s. After a surge in former students declaring bankruptcy to avoid repaying their loans, Congress acted to protect lenders beginning in 1977. First it limited the ability of borrowers with government loans to use bankruptcy as a bailout ramp, and later the ban was applied to all student loans (with some exceptions for hardship cases).
This reform also protected future borrowers. Credit miraculously becomes more available when lenders believe they might be repaid.
Yet as with so many other policies, the Obama Administration displays little interest in learning from the mistakes of the 1970s. If there's not a great outcry over letting borrowers stiff private lenders, eventually you can expect the roll-out of a similar policy for government loans. Most people with difficulty paying back private loans are also struggling with government loans.
While we don't doubt Mr. Obama's sincere impulse to redistribute money, the timing of this effort suggests it is one more election-year pander to the young voters who showed up for Mr. Obama in 2008 but may be less enthusiastic this time. Unemployment among Americans age 20-24 hit 13.7% in June, up from 13.3% in January. So first the President made a big deal over cutting student loan interest-rates to save a few bucks, and now he's telling young voters he's making it easier for them to avoid repaying at all.
Young voters may appreciate Mr. Obama's latest efforts to help them weather the Obama economy. But wouldn't it be easier merely to encourage job creation rather than try to anticipate and make taxpayers pay for every consequence of joblessness?
The essential American soul is hard, isolate, stoic, and a killer. It has never yet melted. ~ D.H. Lawrence
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