> No normal lender would give an 18 year old $50,000 to get a degree in anthropology, because they are unlikely to get it back. When the student is legally obligated to pay it back, then there is much little risk to the lender.
I think the argument goes like this:
1. Allow college debt to be defaulted on
2. After some time the government (or banks) will start to assess the risk of making student loans
3. Some time after that the loan market for students will be less crazy and more rational
4. With enrolled students able to spend less, colleges will be forced to charge less or lose students
5. Some college close, others stay open
6. College now costs a more reasonable amount of money
We're seeing the same dynamic in the college market as we saw in the housing market. The banks were typically in the business of saying "no, you can't do that" to people who were borrowing money, thus enforcing restraint on those who didn't have enough on their own. Once the banks stopped saying "no" when people were not a good credit risk, everyone went nuts and bid housing up to rather crazy levels. Housing prices are inversely proportional to interest rates in a very nonlinear way.
The situation is similar in the college market. The interest rates are more sane, but the risk assessment is much worse. There's all kinds of loan money sloshing around and not a tremendous amount of out-of-pocket money. If college had to be paid out of pocket you'd see lower enrollment or lower prices or both. Allowing defaults will force the market from largely loan-funded to a more reasonable mix of loan and out of pocket funding.
I think the argument goes like this:
1. Allow college debt to be defaulted on
2. After some time the government (or banks) will start to assess the risk of making student loans
3. Some time after that the loan market for students will be less crazy and more rational
4. With enrolled students able to spend less, colleges will be forced to charge less or lose students
5. Some college close, others stay open
6. College now costs a more reasonable amount of money
We're seeing the same dynamic in the college market as we saw in the housing market. The banks were typically in the business of saying "no, you can't do that" to people who were borrowing money, thus enforcing restraint on those who didn't have enough on their own. Once the banks stopped saying "no" when people were not a good credit risk, everyone went nuts and bid housing up to rather crazy levels. Housing prices are inversely proportional to interest rates in a very nonlinear way.
The situation is similar in the college market. The interest rates are more sane, but the risk assessment is much worse. There's all kinds of loan money sloshing around and not a tremendous amount of out-of-pocket money. If college had to be paid out of pocket you'd see lower enrollment or lower prices or both. Allowing defaults will force the market from largely loan-funded to a more reasonable mix of loan and out of pocket funding.