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Moral hazard at the root of our student debt crisis

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Student debt in the United States is currently over $1.5 trillion. Samuel Gregg has recently criticized Sen. Elizabeth Warren’s (D-MA) plan for student debt forgiveness as an answer to this crisis for ignoring the dangers of moral hazard. This post is a follow-up on that one.

In short, as Gregg notes, quoting his book For God and Profit, moral hazard is defined by

circumstances, policies and institutions that encourage individuals and businesses to take on excessive risk, most notably with assets and capital entrusted to them by others, because they safely assume they will not pick up the bill for any failure.

I agree that Warren’s proposal would introduce moral hazard, and I’m especially skeptical of her proposed means to finance it: her “ultramillionaire tax.” Many other nations have tried and since abandoned such taxes because in reality they do not raise the revenue their proponents expect.

That said, I want to point out here that the student debt crisis itself is the product of moral hazard, much in the same way, as Gregg noted, the housing crisis of 2007-2008 was intensified due to government-backed loans, which inflated housing prices and encouraged banks to grant loans to persons who otherwise would not have qualified.

Since the 1980s, student aid in the United States largely shifted from need-based grants to government-backed loans for nearly anyone who wants one. This has inflated prices more than 250% since that time, as colleges and universities have been guaranteed tuition at any price through loans issued without regard to risk.

To make matters worse, unlike mortgages, student loan debt is extremely difficult to discharge in bankruptcy, meaning that when other debt would be renegotiated when the debtor is unable to pay, student debt continues to crush those who can’t bear its burden, indifferent to their economic struggles.

Now, the good news is that our alarming amount of student debt has not yet led to a crisis across our economy, as did the housing crisis. But as Gregg notes, “young people – and their parents – are working out that a college education isn’t the payoff that it used to be.” If we reach a breaking point of such young people and their parents, the bottom may fall out as suddenly as it did in 2007.

So my question is, what alternative is there? Personally, I’m not optimistic, but reforming the problem with bankruptcy and starting to gradually reduce the amount — and raise the standard — of government-backed loans could be a start.

A start — I should say — mostly for those who have not yet incurred any debt. The majority of those who bear it today — and especially those who have defaulted — have already graduated or dropped out. Of course, students and their parents were not passively inflicted with this debt — I would not deny their moral agency. But any solution to the moral problem at its heart must see that they are not the only ones who should bear responsibility. The federal government, banks, and institutions of higher education all contributed to the state we find ourselves today, and the crisis would be much smaller — perhaps not even a crisis at all — if they hadn’t.


Image credit: College admissions consultant at workshop for high school juniors by Tom W. Sulcer

 

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Dylan Pahman Dylan Pahman is a research fellow at the Acton Institute, where he serves as managing editor of the Journal of Markets & Morality. He earned his MTS in Historical Theology from Calvin Theological Seminary. In addition to his work as an editor, Dylan has authored several peer-reviewed articles, conference papers, essays, and one book: Foundations of a Free & Virtuous Society (Acton Institute, 2017). He has also lectured on a wide variety of topics, including Orthodox Christian social thought, the history of Christian monastic enterprise, the Reformed statesman and theologian Abraham Kuyper, and academic publishing, among others.

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