“Student Loan ‘Debt Bomb"; Obama's Misguided Proposal and Mish's Two-Point Alternative Proposal

Here is another great point to further the discussion we have been having around student loan debt and the value of an education.  [January 20, 2012 Is College Still the Path to Success]  This piece is via Mish at Global Economic Trend Analysis whom I follow on a daily basis points out the rise in bankruptcies attributable to the rise in student loan debt.  For those of you that may not be aware of this fact but student loans cannot be discharged in a bankruptcy.  Meaning no matter if you file you still must repay the loan.


In 2010 the average graduating student carried with them $25k in debt, a 5% increase over the previous year.  Parent loan debt related to the cost of education averaged $34k.  Both according to a paper published by National Association of Consumer Bankruptcy Attorneys.  According to the NACBA 81% of attorney's surveyed saw an increase in bankruptcies associated with student loan debt.

Mish's two point problem, two point solution from his post are


Two-Point Problem 

1. Guaranteed loans of any kind are a huge problem. An even bigger problem is guaranteed loans that cannot be discharged in bankruptcy. Schools have every incentive to drive up costs and to make loans to kids who simply do not belong in school at all,  as well as to kids whose benefit of education is far less than the cost of education.
2. Lack of competition. We need more accredited universities that can offer online programs, at far cheaper prices.

Two-Point Solution

1. Cancel the student loan program in entirety for new students and phase out student loans over the next three years for anyone already in such programs. 
2. Accrediting some online education programs say from India, would certainly go a long way towards massively increasing competition and reducing costs. Obviously some classes need to be hands-on type (lab work), but I am sure that can easily be arranged in conjunction with local colleges.

I tend to agree with getting the government out of the student loan business just like the housing loan programs but unlike housing where you have a physical asset for collateral I don't know who steps to the table to back student loans in the private sector.