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Student Loan Bubble
Federal Debt Collectors Get Tough with College Grads

The return on investment for a college degree is getting worse even as the number of Americans struggling to pay off their loans is rising to crisis levels. Earlier this week, Wonkblog ran a graph by Peter Thiel plotting the rise of student loan debt against the median income for B.A. holders. The chart speaks for itself:


With that as a backdrop, consider the recent New York Times story on the Educational Credit Management Corporation (ECMC), a private nonprofit that the government has been using to fight borrowers looking to discharge some of their loans in bankruptcy. The organization’s tactics are so bare-knuckled that it has been repeatedly censured by the courts for abusing the bankruptcy process. To cite just one example:

The case that caused the bankruptcy judges to accuse the agency of abuse concerned Barbara Hann, who took a particularly drawn-out beating from Educational Credit. In 2004, when Ms. Hann filed for bankruptcy, Educational Credit claimed that she owed over $50,000 in outstanding debt. In a hearing that Educational Credit did not attend, Ms. Hann provided ample evidence that she had, in fact, already repaid her student loans in full.

But when her bankruptcy case ended in 2010, Educational Credit began hounding Ms. Hann anew, and, on behalf of the government, garnished her Social Security — all to repay a loan that she had long since paid off.

When Ms. Hann took the issue to a New Hampshire court, the judge sanctioned Educational Credit, citing the lawyers’ “violation of the Bankruptcy Code’s discharge injunction.”

Many have argued that these kinds of tactics are ultimately necessary to keep the student loan program functioning. After all, making it easier for students to discharge loans in bankruptcy makes these loans riskier for lenders, and could lead to a system where it is more difficult for many students to get loans.

But this, ultimately, gets at the crux of the problem. The growth in readily available federal loans has played a key role in driving college tuition upwards, to the point where few families can afford to send their children to school without borrowing. The whole student loan program needs a serious rethink—government programs should be focusing on pushing tuition down, not pushing lending up. When the government needs to hire loan sharks to convince struggling college grads to pay up—for something that’s increasingly offering poorer and poorer returns on both time and money invested—something has gone terribly wrong.

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  • rheddles

    Wait a minute. This sounds a lot like the housing crisis. Except you can’t mail your diploma back to the bank and stop paying off the loan. Maybe it’s not the student loan program that needs a rethink, but the whole idea of the government distorting free markets by guaranteeing loans of any type, imports, exports, agriculture, housing, education, the list goes on for ever. Everybody gets to be in a special interest group and feast at the trough without risk.

  • Andrew Allison

    What needs to be re-thought is the practice of sub-contacting the collection of debt owed the goverment to private companies.

    • Kavanna

      It’s all debt that should never have been incurred in the first place. The “private” collection agencies are just doing the government’s dirty work, so that politicians can lash out at “greed.” It’s the government policies that are the problem, as many commenters have said in analogy with the subprime mortgage bubble. Collection agencies are just cogs in a government-run show.

      • Andrew Allison


  • free_agent

    You write, “something that’s increasingly offering poorer and poorer returns on both time and money invested”.

    Though in a twisted way, perhaps that means that the program is working: In an open market, if a particular investment has a reliably higher return than alternative investments, *not enough of that investment is being purchased*. There will be “the right number” of people going to college when, in aggregate, going to college pays the same return as any other mass investment opportunity.

    • Kavanna

      Not if the “investment” is bought with massive amounts of debt that can never be repaid. Then it’s definitely a bubble, and college needs to be reset to a smaller pool of students at much lower cost.

      • free_agent

        Yeah, if you can’t pay off the investment with the proceeds, then far too many people are making the investment.

        But it seems that the amount of debt students accumulate varies tremendously. It was only recently that the total amount of student debt exceeded the total amount of auto loans (and those are paid off in 5 years or so). My alma mater (Grinnell College) says you are assured of getting out of there with at most ~$25k in debt. But others, especially affluent, academically weak students who barely qualify for high-prestige schools, can wind up paying $50k or more per year.

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