By Kevin D. Williamson
Wednesday, February 25, 2015
Some years ago, I was living in a rundown section of
Lubbock, Texas, known locally as the “Tech ghetto” — being populated by a great
many young Texas Tech students on modest budgets and the occasional junior
staffer at the Lubbock Avalanche-Journal earning $400 a week — when I got a
knock on my door and opened it to find a not especially prosperous-looking man
of some years holding before him a silver tea service, which he was eager to
sell me. I began to run through my neighbors in my head, trying to identify
which household was most likely to have been burgled in the past five minutes
by the man on my doorstep. I would have called the police, but I didn’t have a
telephone at the time. I declined his offer, and advised the fellow that I
would decline it much more emphatically if in the next minute or so he was
still visible from my doorway. But not everyone feels the same way about
trafficking in stolen goods — on and around New York City’s Canal Street,
hordes of tourists come to pick over counterfeit versions of luxury handbags
and high-end watches, counterfeiting being only another form of theft, albeit a
slightly indirect one. But there are no illusions on Canal Street — everybody
knows exactly what is going on.
You would not know it if you knew the world only through
the declarations of Elizabeth Warren and Occupy rhetoric, but bank loans do not
generally work like that. JPMorgan Chase does not send out legions of
small-time criminals to knock on doors in low-income neighborhoods with the
hopes of ensnaring some new mortgage customers, and if you want to open a line
of credit with Deutsche Bank, you do not do so by making some discreet, oblique
suggestions to a guy with a bunch of fake Gucci purses hanging on his wall
before being led into a back room where real business is conducted. If you buy
a car on credit, there are dozens of forms to be read, lines to be signed upon,
and consultations with third parties. There are reams of bureaucratic
documentation involved in getting a simple and straightforward credit card. And
student loans are not something that simply happens to unsuspecting young
people wandering around the precincts of higher education. They have to be
sought out, applied for, approved, etc.
American households have been getting their act together
on debt, at least a little bit, since the financial crisis and the subsequent
recession. Credit-card defaults, after spiking around 2009, have been in decline,
as have mortgage defaults and car-loan defaults. Home-equity loans took a
little longer to get straightened out, but defaults on those are in decline,
too, and have been for some time. (Much more on all that from the New York Fed
here.) But one kind of debt default remains stubbornly on the rise: student
loans, which in total add up to more than all U.S. credit-card debt and are
much more likely to be in default than any other major debt category, far
outstripping credit cards in the No. 2 default position.
On Monday, The New Yorker offered a sympathetic report
(“A student-loan debt revolt begins”) about 15 former students of Corinthian
Colleges, a dodgy and now largely defunct operator of for-profit schools, who
intend to stop repaying their student loans as a matter of principle. “They
believe that they have both ethical and legal grounds for what appears to be an
unprecedented collective action against the debt charged to students who
attended Corinthian schools,” writes Vauhini Vara, “and they are also making a
broader statement about the trillion dollars of student debt owed throughout
the country.” Senator Warren has called on the federal government to simply
discharge the debts of former Corinthian students. An Occupy-affiliated
organization called Debt Collective is pressing a similar agenda.
What does not seem to have occurred to Senator Warren, to
Debt Collective, to the Corinthian 15, or to Vauhini Vara and the editors of
The New Yorker is this: The students in question do not owe money to Corinthian
Colleges. They owe money to third parties, those being private lenders and the
federal government. As an instrument of protest, they might as well stop making
their car payments, skip their rent, or boost mocacchinos from Starbucks — the
people who lent them money are no more responsible for Corinthian’s woes than
are their landlords and baristas.
This is classic leftist misdirection. The students in
question took out loans and used their credit to purchase a defective product,
no different from putting a bucket of magic beans on a MasterCard. They made
poor decisions with other people’s money, which is not entirely surprising:
Access to other people’s money is an invitation to making poor decisions. There
is an excellent case to be made that they were defrauded by Corinthian — or, at
the very least, that Corinthian failed to deliver on services contracted — and
that the students are therefore entitled to a refund of the money they paid to
the firm. But just as MasterCard is not responsible if you put a lemon on your
credit card (you’d be shocked how many people purchase cars with credit cards),
Bank of McNasty and Uncle Stupid are not responsible for legal adults who
borrow money to buy subpar educational services. This is not to say that the
students in question weren’t mistreated — it certainly appears that they were —
but they were not mistreated by their banks.
Michelle Obama famously complained about having to make
cumbrous student-loan payments early in life, blithely oblivious, as she tends to
be, that one has a moral obligation to pay one’s debts, and that student loans
are generally made at concessionary interest rates, meaning that somebody,
somewhere, is doing you a favor by lending you money at below-market rates.
Part of the problem is that nobody much knows what a
market-rate loan for a college education should really look like. Most student
loans are either made by the federal government or guaranteed by the federal
government; the 2010 Student Aid and Fiscal Responsibility (ho, ho!) Act, which
was rolled into the Affordable Care (ho, ho!) Act, eliminated federally
subsidized loans and replaced them with direct federal loans. If you think of
the student-loan bubble as being like the subprime-mortgage bubble — and it is
— then SAFRA “solved” the problem of subprime lending in the private sector by
replacing it with subprime lending by the government. There are basically no
underwriting standards when it comes to student loans, which are mainly made to
young people who have little or nothing in the way of credit histories upon
which to evaluate their creditworthiness. Intelligent approaches, such as
taking into account the institution being attended and the degree being sought,
naturally are unthinkable, implying as they do such inegalitarian outcomes as a
Wharton MBA student’s being judged a better risk than a women’s-studies major
down the road at Temple or an “individually designed major” major at Menlo
College paying 40 grand a year.
See if you can spot the pattern: The federal government
decides that health insurance is a right, but also decides that traditional
methods of evaluating health-insurance risk are unfair (read: “politically
unpopular”), gets directly involved in the market, and health-care prices go
way up; the federal government decides that access to mortgage credit is a
right, but also decides that traditional methods of evaluating
mortgage-borrower risk are unfair (read: “politically unpopular”), gets
directly involved in the market, and housing prices go way up before crashing
and causing a worldwide financial catastrophe; the federal government decides
that access to student loans is a right, but also decides that applying
traditional methods of risk evaluation to those loans is unfair (read:
“politically unpopular”), gets directly involved in the market, and college
prices go way up . . .
If you make cheap money — credit at below-market rates —
available for the purchase of X, then the price of X will typically go up.
Dodgy operations like Corinthian (or Countrywide) will spring into existence to
soak up the great raging streams of money being shunted into the X market. Just
as people will buy more expensive cars when zero-interest financing is
available, and people will buy more expensive houses when
squat-down-interest-only-Crazy-Eddie-clown-show mortgages are available, people
will spend money irresponsibly on higher education when they are spending
somebody else’s money, which is exactly what is happening when the federal
government arranges loans at concessionary rates. Sweetheart financing is a
favorite federal gimmick, because the federal government, unlike a bank, does
not have to account for or price the risks it assumes when making loans. If the
federal government just gave students money rather than giving them money
indirectly by offering them loans without the risk properly priced in, that
spending would have to show up on a budget, somewhere. Discounted financing is
one of the ways that the federal government spends money on political
constituencies — college students, politically connected businesses and
industry groups — without having to honestly account for the money spent.
But there’s more than $1 trillion in student loans out
there, and you’re on the hook for a lot of it — not in a bank-bailout,
too-big-to-fail, indirect way, but explicitly. And the default rate continues
to climb — and the progressives are embracing loan default as a moral good. If
you think that’s smart financial management, I know a guy who will make you a
great deal on a silver tea service.
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