If officials in Washington want to take meaningful action against the student debt crisis, the most important step is to stop backing loans to schools that leave their students with no hope of gainful employment. And if that means eating loans that never should have been made in the first place, then so be it. Policy makers in Congress and the US Department of Education need to understand that there’s a cost to facilitating billions of dollars in loans to students who attended dodgy schools — and that cost shouldn’t be borne solely, or even primarily, by young people who were simply gulled.
The Wall Street Journal reported recently that thousands of people are asking the federal government to forgive their student loans, on the grounds that their schools had misled them about their potential career paths and earnings prospects. Lying about alumni earnings is an illegal recruitment tactic. And under a heretofore little-known federal law, students at schools that use such tactics can get their debt canceled. According to the Journal, 7,500 people with a total debt load of $164 million have made claims in the past six months, and federal officials have no idea how many more people may step forward or what the ultimate price tag may be.
Up to now, student loans have operated under the principle of letting the buyer beware. The federal government offers loans to an expansive range of schools — including large chains of for-profit technical and art schools whose business models rely on a steady supply of students who bring federal financial aid money with them. The Obama administration has moved aggressively against some. Corinthian Colleges declared bankruptcy last year after Department of Education regulators concluded that the chain had falsified graduation and job placement rates. (The Consumer Financial Protection Bureau sued the company, arguing that the private loans it offered to students above and beyond their federal loans amounted to predatory lending.)
At that point, the federal government opted to cancel $28 million in debt owed by Corinthian students. Yet there's no reason to think the Corinthian schools were the only ones using overly rosy data to attract new students.
Unfortunately, the federal financial aid process has been built to keep the flow of taxpayer money going while attaching few or no conditions to it. Republican supporters of for-profit education accuse the Obama administration of an unfair crusade against unconventional schools that cater to underserved student populations. Yet the weaker nonprofit schools are almost as wary of increased government scrutiny. Democrats have proved receptive to arguments that all institutions are unique, and therefore the government shouldn't try to second-guess how well they serve their students.
Ultimately, though, the government shouldn't get behind loans for a school unless it can vouch for the quality of the academic offerings. If taxpayers end up paying the tab for students who take out tens of thousands of dollars in loans to attend substandard schools, policy makers will have an incentive to fix the underlying problem.