by James A. Bacon
There aren’t many things that almost everyone across the ideological spectrum agrees about, but one of them is that indebtedness from student loans is out of control. Here in Virginia, about one million students owe roughly $30 billion, according to the Richmond Times-Dispatch — or about $30,000 each on average.
The loan burdens can be difficult enough for students who graduate with degrees, but the debt can be devastating for those who don’t complete their degree requirements and don’t achieve the earning power they expected. Commenting on the Richmondsunlight website, Ruth Hall asks:
What about a person who becomes disabled before completing their education? Where is the concern for them regarding paying back student loans when their only source of income is social security disability? My daughter has a rare disease (as defined by the NIH) that struck her in her early 30’s. She is unable to work, but her social security disability check is garnished to pay her outstanding student loans. Already living in poverty with an income of $1000 a month, losing $150 a month to student loans affects her ability to provide for herself. Student loans never go away and she will never be able to finish college or return to earning a living due to this rare disease.
But not all debtors inspire the same degree of sympathy. The Times-Dispatch quotes one student griping about the $250,000 cost of his education, including the interest on the $190,000 he borrowed to attend the University of Virginia and the University of Richmond Law School. Is his complaint really with the debt and interest — or with the outrageous cost of higher education? The young man worries that he might have to sacrifice his career in public interest law. Perhaps he should have considered the consequences such a massive debt before embarked upon that particular goal!
Another student said she didn’t realize she owed $32,000 for a nine-month medical assistant diploma from Corinthian College, which she says turned out to be worthless, until it showed up on her credit report. She said she had been told grants and scholarships would cover her costs. “I still to this date have never received a bill” or documentation, she said. Either she was defrauded, in which case she should collect damages in a civil suit, or she was negligent in understanding the obligations she was incurring, in which case it’s hard to muster much sympathy.
Regardless of the circumstances of individual loans, it’s clear that thousands of Virginians have a problem. The question is, what do we do about it?
Sen. Janet Howell, D-Reston, and Del. Marcus Simon, D-Falls Church, are lead patrons of SB 52 and HB 400 respectively, identical bills that would create a Virginia Student Loan Refinancing Authority. The Authority would be tasked with creating a program in which Virginia students with educational loan debt “may receive a loan from the Authority to refinance all or part of his qualified education loans.”
Where would the money come from to refinance the student loans? The Authority would issue bonds. However, the Commonwealth of Virginia would take on no financial risk. The bills explicitly state: “No bond of the Authority shall constitute a debt or pledge of the full faith and credit of the Commonwealth or any political subdivision of the Commonwealth and each bond shall be payable solely from the revenues and other property pledge for such payment.”
Bacon’s bottom line: Howell and Simon deserve credit for devising an innovative approach to the problem of student indebtedness. I have major reservations, but I think their idea deserves deserves thorough airing and debate. The devil, of course, is in the details.
Investor appetite for the Authority’s bonds will determine how much money the Authority will have to work with and how many students it can help. I would like to know how prospective bond underwriters would evaluate the quality of the debt, what interest rates they would demand, and what flexibility the Authority actually would have to offer students better loan terms. I presume that the bonds would be classified as tax-free municipal debt, which would be cheaper than private-market financing. On the other hand, participating students , presumably those with the greatest need, pose a higher-than-normal risk of default, which could push interest rates higher.
Currently, the federal government assumes the risk for student loans gone bad. A Virginia student loan authority would assume that risk for the debt that it restructures. The transfer of risk needs to be examined very carefully. Even if the state’s full faith and credit weren’t on the line, bond defaults by the Authority would be a debacle for the state.
Otherwise, my main reservation is that creation of a Virginia Student Loan Refinancing Authority is only a palliative. This proposal would not address the underlying causes of the problem — out-of-control costs at Virginia colleges and universities, and indiscriminate lending by the federal government regardless of a student’s likelihood of repaying their debt. That’s what got us into this predicament, and anything that dulls our laser-sharp focus on those realities only delays addressing them.
