How to Fix the Broken Student Loan System

PHOTO: People who need credit the most are getting denied because banks consider them too risky.

As Washington slides ever closer to the "fiscal cliff," "financial vortex," or whatever will be the next term du jour, and our national focus finally shifts to fixing that which has heretofore been deemed "unfixable," perhaps 2013 is the year we try to fix our very broken student loan system.

In the first quarter of 1999, Americans owed $90 billion on student loans. It now exceeds $1 trillion. That's not a bubble, dear friends, that's a black hole.

The laissez-faire environment that allowed this extreme growth (1,100 percent) has more in common with the repeal of the Glass-Steagall Act or the zoning plan of the greater Houston area than it does with a properly functioning free market system.

The Confidence Game

Higher education has become a confidence game, with banks and slick marketing machines playing shill in a scam where the "mark" is the dream of American prosperity, parental aspirations and an army of kids conned into believing that an appreciation of Shakespeare will magically result in higher net worth.

At the risk of sounding like Rick Santorum (which in my world is a fate far worse than death), just because there's plenty of dough doesn't mean everyone should go to college. Among those who are gifted in a college sort of way, the lack of financial literacy that prevails among prospective students is dangerous. Kids are not being prepared for the challenges of life -- including the acquisition of a job, housing and all the rest -- so much as they are being prepped for the rigors of witty banter at a cocktail party.

We face a moral hazard. Money is too easy to get. Kids aren't taught about the realities of the workplace. They get hard-to-market degrees, rack up a lot of debt and then can't find jobs that pay enough to justify the expenditure. It's deadly, too. The government farms out delinquent student debt to collection agencies -- those boiler room guys who specialize in intimidation. The result: suffocating debt and an increase in suicide among jobless graduates.

You Want a Piece of Me?

Last week Congressman Tom Petri introduced a plan to tackle student debt. The Wisconsin Republican's solution will be quite familiar to people from Commonwealth countries, including the U.K., New Zealand and Australia. It allows automatic withdrawals from a borrowers' paycheck (capped at 15 percent of a borrower's income) to be managed directly by the Education Department and the Internal Revenue Service. In fairly short order, this practice would ease the demand for the services of collection agencies, saving an estimated $1 billion in commission payments that would otherwise go to those dastardly denizens of the deep.

"This doesn't mean leaving taxpayers on the hook if a student borrows too much," Petri told Bloomberg News. "It does mean providing much stronger protections against the kind of financial ruin that is all too prevalent in our current system."

Rep. Petri's heart is in the right place, but he's missed the mark. The only thing that will prevent the financial ruin associated with the current system is to end the conditions that make it possible.

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