Thursday, September 1, 2011

Student Debt

This is obviously a case of very poor incentives:

The schools sometimes push these students into high-cost private loans that they can never hope to repay, even when they are eligible for affordable federal loans. Because the private loans have fewer consumer accommodations like hardship deferments, the borrowers often have little choice but to default.

Worse yet, these loans and the bad credit history follow the debtors for the rest of their lives. Even filing for bankruptcy doesn’t clean the slate.

I think the experiment with undischargeable debt has been tried many times over history and it never really ends well. Financing higher education is always going to be tricky (due to the large sums involved and the fact that students do not have a credit history). It also doesn't help that students lack assets so it can be an economically rational decision to accept an early career bankruptcy to discharge a six figure debt.

But the opposite extreme is looking increasingly like a bad idea.

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