There is a lot of talk of student loan forgiveness around the US now. I think that it would be a supremely bad idea because it is rewarding stupid behavior.

I do have a proposed solution to it. It breaks down into two parts: loans that are already out there and new loans.

Firstly, one of the biggest problems with student loans is that under President Clinton there was a bill passed that basically made it almost impossible to discharge student loan debt with bankruptcy. This leads to lenders being ever more eager to fund any load they can because they know they’ll get paid.

Secondly, the US federal government backs up those loans even if they are not repaid by the students. This makes the lenders even more likely to give away money since they are not only not on the hook if the student can’t pay, because they will since they can’t walk away, but the government will pay them anyway. You can’t lose.

Another effect that all of this had in the education market is that for every $1 of student loans that the government is backing, the cost of secondary education goes up $0.70-0.80. Cheap money and a limited supply cause prices to go up with a very simple supply-and-demand curve.

So, how would I fix it?

First: repeal the Clinton-era law that lets the loans survive bankruptcy. This doesn’t affect the banks since Uncle Sam provides a backstop anyway. It does let students walk away from the debt as they can with anything else. There is a price to pay, namely a seven-year hit on your credit report, but I think it’s very fair. A student who is taking out a loan should know they need to pay it back, just like a loan for a house, car, or credit card.

Second: for loans going forward do not guarantee payment by the federal government. The upshot of this is that banks will be forced to pick and choose who to loan money out to and for what programs they’ll be paying for. Just because you got accepted into an art history program doesn’t mean that the bank will think that you’ll ever pay it back. This doesn’t mean that things like art history will never get funded, but it’ll take things like better grades and a proven track record to get the loan.

This is the same as something like auto insurance. If you have a record of good driving and are driving normal cars you’ll tend to get a better rate than if you have a poor driving record or are driving a sports car. If you are a student who is excelling at arts and has a proven track record of good grades and achieving their goals then a bank will more likely loan you money on a niche career path.

I believe that this will solve the problems with higher education almost completely.

So… you didn’t get a loan to go to your dream school. Ok, what about doing something like community college for a few years first and build up that track record for the banks. Or maybe a trade school? I was just looking at a school here in Nashville that’s a year long and only costs around $5000. At the end of it, you get certifications for a career that’s very much in demand and you don’t have a mountain of debt on top of it all.

There, my friends, is my humble proposal.