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Saturday, September 5, 2015
Would allowing students to default on debt through bankruptcy help fix tuition/possible student loan bubble?
Obviously the elephant in the room on student loan debt and college tuition is that the government is feeding endless taxpayer dollars into the system. However, I wonder what effect allowing students to default would have on the system, and need more economic minds to help me out. Currently, as we all know, student loans can't be defaulted upon (though Obama has invented a default plan for the remainder after 10 years). This not only keeps interest rates down but it almost doesn't matter what students major in, whether or not they drop out (>40% drop out rate), or if they even choose to work. That's because regardless of what they earn or how long it takes, eventually they will have to pay it back. It's a form of indentured servitude. Of course, Obama's forgiveness plan doesn't apply to the most important (judging from salary) majors, so in essence, it decreases the disincentive for the poor major choices at least 40% of graduates continue to make (liberal arts and other majors expected to have higher unemployment, lower pay). However, what if we were to allow *everyone* to file bankruptcy and get out from under their loans? In a free market, that would mean banks and other lenders would be aggressive and careful in investigating their loan applicants: How'd you do in high school? What was your SAT score? What major are you picking and what is the expected income from that major? Do you have a criminal record (and therefore lower employment aspects)? I remember when NAU's law school accepted a [convicted murderer](http://ift.tt/1KwZ4gz) as a student, knowing full well he would never work as a lawyer. Naturally with the government element in funding the loans, the allowance for default would end up with a massive expansion of the program coupled with even less of a payback rate. Sometimes when things like this get out of control, we get lucky and they stop funding it or start being more discerning. Maybe, just maybe we'd have reform or partial privatization of the system as free-and-clear taxpayers demand they stop subsidizing universities. Thoughts?