A cramdown on student loans

May 1, 2009

A "CRAMDOWN" is when the government forces banks to reduce what borrowers owe them. Right now, Congress is considering whether to give bankruptcy judges the power to order cramdowns for certain homeowners, people whose homes are worth less than their mortgages.

We should go further. The U.S. needs a general cramdown of student loans, a 50 percent cut.

It's a scandal that U.S. college students are forced to go way into hock to pay for their studies. On April 17, the New York Times reported that two-thirds of college seniors are graduating owing money for their degrees. The average debt is $22,500. Some owe lots more.

Why isn't college education free? Until the mid-1800s, elementary and high schools cost money, but after a long effort, it became commonly accepted that free public education at those levels was of great benefit to society and was a basic right. But why stop at grade 12? They don't in Europe. Many countries there have low-cost or free college education.

Just like people who were suckered into deals to take on huge debts to buy a home that they couldn't afford, college students have been fooled into taking on massive college loans on the promise that they would get a career as soon as their studies were over. With the jobless rate soaring toward depression levels, new graduates are facing the ugly truth that they might not get jobs in their field for years, if ever.

Graduates can usually delay paying colleges debts for a time, but only at the cost of piling up more interest payments. Lenders can charge steep penalties for late or missed payments because they know that sooner or later they have to be paid. As the Times points out "student loans are among the most ironclad debts, on par with child support, alimony and overdue taxes. They stick with you no matter what." You don't even get out of them by declaring bankruptcy.

The immediate effect of all of this is that new graduates cut way down on spending. Of course, this just adds to the woes of businesses, and they try to solve it by firing more workers.

We can't immediately get free higher education, but why not some measure of justice? The U.S. has spent, lent or guaranteed $12.8 trillion dollars to shore up the bankers and stockbrokers with the promise this will make things prosperous again. It hasn't worked. Everyday there are new reports of mass layoffs. The banks are sitting on the money because they don't see how they can make a buck lending to the unemployed.

Let's take a new approach. Cut student debt in half, and give these spenders some spending money. Cramdown now!
Stanley Heller, from the Internet

Further Reading

From the archives