When I studied for the CPA exam (20+ years ago) we had an instructor who prepared us for the legal portion of the exam. He asked the question – why can you not discharge debt used for higher education in bankruptcy? He joked it was because the medical students used to graduate with cap in one hand and a bankruptcy petition in the other, so after a while the financing providers got together and changed the rules to what they are today, which basically say that you can never discharge your student loan debts through bankruptcy.
I remember when the housing bubble began and started reading about complex mortgages with payments that rise or even interest only mortgages, and was thinking, who are the people taking out these loans and how can they possibly understand the down side of what they are doing? There COULD be a reason to do these types of loans by a rich and financially sophisticated investor (more so than me) if they had offset positions or had a cash poor business with long term potential but these circumstances did not apply to the average guy who just used these tools to leverage up even more, betting on continuing gains.
While some people may have seen the real estate boom collapsing, or Fannie and Freddie going under, NO ONE saw that the GOVERNMENT would basically take over the entire housing market. Today government FHA loans comprise the vast majority of new originations, and government moves like the $8000 housing credit for first time buyers prop up the market. The government also keeps interest rates down as well as down payments, meaning that people can qualify for 30 year mortgages at insanely low rates with virtually nothing down (3%, but many builders or other parties can even front you this pittance). They continue to operate Fannie and Freddie which hemorrhage cash and run up big losses and there aren’t even plans to get out of the market for fear that housing will plummet since there is hardly a financing private sector anymore.
How are these two concepts connected? Easy. As people start to digest that people with $100,000+ of debt that is accruing interest faster than they can hope to earn on their investments (to the extent that they have any) are basically indentured servants to this debt, there will be calls for the government to take over this burden. You will see it happen in bits, here and there, but over time the government will take on more of the role of providing debt and of offsetting debt for various hardship reasons. And as the government starts to weaken this rule that you can’t discharge bankruptcy debt, private investors will exit immediately and then soon only the government will be issuing education debt, making it that much easier for them to let people “off the hook” for paying it (after all, it just is piled into the $3 trillion debt, along with the hundreds of billions Fannie and Freddie consume).
Another way to come up with a lot of quick votes would be just to rescind the exception that you can’t discharge student loan debts. Maybe they’d start with veterans or some other sympathetic group but once they open that door a crack it will swing wide open.
When you see a situation that is unsustainable, many people can see the first step, but you need to follow through to the end. Piling up this much debt on young people that they can’t escape seems morally reprehensible, especially when there aren’t a lot of jobs out there today even if they had a useful degree, which many of them don’t. In the end, somehow or another, they are going to walk from these debts, and when it happens at a huge magnitude (like people walking away from their mortgages today) then it will hit a tipping point when it is not morally questioned and then the system will capsize. The judges aren’t going to garnish all their wages forever, and they won’t be sent to jail. It will just be a massive walk-away.
I am not smart enough to see where it ends up. Likely if the debts weren’t guaranteed, the universities would have to pare back to something that was reasonably payable, and most of the marginal universities would fold. Loans for professions that were unlikely to be paid back (sociology, history, English, philosophy, plus many trade-school type degrees like cooks) would also be impossible to get.