Underwater Ethics and Education

by Carl Hausman

From the “just when you thought it couldn’t get any worse” file: Student loan debt, which totals about $1 trillion in the United States alone, is now larger than all U.S. credit card debt.

And like all debt, student loan obligations have the potential not only to be a personal debt bomb, destroying individual finances, but also to spread financial collateral damage throughout the entire economy by stifling credit and spending.

The figures are jaw dropping:

• More than three million households owe at least $50,000 in student debt, according to an analysis cited by theChicago Tribune, which quotes Illinois attorney general Lisa Madigan characterizing the debt crisis as “a threat to our country’s financial stability … [with students] on track to become part of a generation burdened by debilitating debt, limited career prospects and therefore long-term financial insecurity.”

• Ninety-six percent of students in private, for-profit colleges take out some sort of student loan, says a Congressional report. Fifty-six percent of students at private nonprofit colleges take out student loans, and 48 percent of enrollees at public nonprofit colleges do likewise.

• About two-thirds of recent graduates have more than $25,000 in student-loan debt.

• About 9 percent of those who have taken out student loans have defaulted, notes Forbes.

• The burden is not confined to the young, who presumably have decades to sort out their financial woes: The U.S. Treasury Department says that more than 100,000 Social Security retirement checks are being garnished for student loan default; many retirees went into debt to finance children or grandchildren, but some were seeking new career skills for themselves. More than two million defaulters are over the age of 60, according to one analysis.

And, as is the case with the mortgage bomb, controversy over student-loan debt revolves in many ways around questions of ethics. Among the dilemmas:

Do debtors shoulder the entire blame for their actions, or is their responsibility mitigated by the techniques used to entice them to borrow money for what turned out to be less-than-marketable training? A recent U.S. Senate report slammed the private, for-profit college industry, saying that educators had overpromised and underdelivered, luring often-unsophisticated students into entering programs for which they had to borrow heavily. Many who testified before the Senate claimed that their lives are being ruined by staggering debt attached to what turned out to be worthless training. Others said that they dropped out of educational programs because of inadequate mentoring by educators. But, others counter, these are adults who made their own choices. Should colleges be held accountable for a consumer’s decision? For a student’s lack of ambition? Is an unwise choice of career path the fault of anyone except the person who made the choice? Is dropping out the fault of the student or of the educator?

Along the same lines, should colleges be expected to predict who will do well in the post-college job market, who will be able to repay loans most efficiently, and who will be least likely to default? The U.S. federal government — the major player in the student loan industry — imposes sanctions on colleges with a high default rate. California Watch, a nonprofit investigative journalism center, reports that 16 California community colleges have stopped participating in the federal student loan program because of fears that they will lose federal aid if their default rates climb. Whose responsibility is it to predict the viability of a particular career path? And should that even be a consideration? Should those undertaking studies in fields not seen as particularly lucrative at the moment (e.g., the humanities, music, journalism) effectively be cut off from student loans?

Should student loan obligations be forgiven or eased? Federally backed student loans are extraordinarily difficult to escape. As the New York Times reports, even conventional bankruptcy won’t free a debtor since Congress specifically exempted student-loan debt from bankruptcy protection in the 1970s after lawmakers became outraged over reports of new doctors and lawyers filing for bankruptcy and cleaning the slate for a lifetime of pure profit. Later, exempting student-loan debt from bankruptcy protection was broadened and extended to private lenders. Today, those seeking relief from student loans must go through a separate court process in which they not only have to prove insolvency but prove a “certainty of hopelessness” for the rest of their careers. As a society, we recognize the necessity of honoring one’s promise to pay, but also factor in the realization that extraordinary circumstances can demand relief from debt that is impossible to repay.

A sweeping “bailout” of student loans isn’t on the radar yet, and some knowledgeable observers in government contend that this category of “debt bomb” won’t produce the same sort of meltdown as mortgage debt. Of course, knowledgeable observers in government also downplayed the risk of mortgage-backed securities, so it’s reasonable not to take anyone’s word as the last word on the matter.

My view is that adults, even young ones, generally must stand by an obligation. Trust — not just money — is what propels an economy. (When you deposit money in a bank, you trust that the bank eventually will be able to return it to you, even though you know — or should know — that the bank does not keep all depositors’ money in a vault and that it would be unable to return all funds if all depositors suddenly decided to withdraw their savings at once.)

Having said that, I support protection and relief from deceptive transactions. There is evidence, as presented in recent Senate hearings, that some for-profit institutions goaded students into financing their education with public and private loans but withheld the fact that their programs did not conform with credentialing or accreditation standards, leading potential students to believe they would be employable when that assuredly was not be the case.

Finally, I can’t rule out the utility of an eventual bailout if it serves the greater good. While the verdict isn’t in yet on whether government bailouts of major investment banks were an unqualified success, the action did thaw credit markets — allowing business of all types to proceed — and returned the investment houses and firms that insured them to profitability.

What’s your view? Do you support — ethically and practically — the concept of some sort of bailout for those who are underwater with their student loans? Let us know in the comment boxes below.

©2012 Institute for Global Ethics