Anticipating the President's Student Loan Reform

President Barack Obama will announce a new plan to allow students holding both private and government student loans to consolidate their debts into a government loan, thereby reducing their interest rates, officials inside and outside the Obama administration said Tuesday. 

Mr. Obama is to announce the move in Denver on Wednesday, part of a White House push to emphasize actions the administration can take to boost the economy without congressional approval.

A few things to think about with this….

1. It’s quite unprecedented to have Federal consolidation of both private and Federal loans. This effectively removes another layer of risk for the private lending corporations. While this sounds good for debtors who want to consolidate and apply for income based repayment, I worry that the risk-amelioration for private lenders would continue to make the problem worse- making it “okay” for students to take out huge debt, encouraging tuition hikes since students can more easily deal with it, and subsidizing private profits for these lenders. It will help to know more details about how this transaction between private and public balance sheets will play out.

2. Many folks agree that Federal loans are even tougher to deal with than private, for all kinds of reasons including having even less consumer protections and the power to garnish wages/licensure (also, SWAT teams). The biggest problem here though is that it is still completely impossible to discharge these loans in bankruptcy. Even with income based repayment (IBR), this could be a problem. Say someone has their health insurance severely cut and now must pay a large portion out of pocket, meaning they cannot make the IBR schedule or 10 or 15% of income since they need that to cover medical bills. Should this person need to file for bankruptcy due to racking up medical expenses, those loans will still never be discharged.

3. Although the plan sounds “nice” and would probably help a lot of people, part of me thinks money would better be spent investing in free public higher education rather than buying up loans. We need to get to the root of the problem, not dance around half-efforted patches.

4. Final point is to just be cautious with this, but I guess it’s a decent start? I can’t really say until the fine print is published.

Are there are precedent cases of the government buying up large chunks of personal private debts like this? The bank bailouts inadvertently did, but it wasn’t as direct as Federal consolidation of mortgage debt for individuals.