Helping indebted dropouts

The Wall Street Journal reported recently on a White House report on student debt with an interesting twist on the claims that student loans represent the next economic bubble. That twist? That $1.3 trillion+ in debt is helping rather than hurting the economy:

The White House just released a big report on student debt that contains all the familiar horrors about for-profit schools, indebted dropouts and students defaulting on their loans. But it has an interesting conclusion: That growing stack of $1.3 trillion in student debt is helping, not hurting, the U.S. economy.

The White House report, as with other studies, largely divides student borrowers into two groups: Graduates and dropouts. The first group, the majority, are doing just fine, even though tend to carry the heaviest student-debt balances. They are among society’s highest earners, thanks in large part to the degrees that the debt financed. They’re well-positioned to buy homes, and they’re helping improve the nation’s productivity because they learned skills that employers need.

The dropouts—a sizeable minority—are hardly doing fine. They’re making very little, they’re not buying homes and they’re damaging their credit. But because they are a contained group—there are about 7 million people in default on their federal student loans, out of a nation of more than 321 million—they don’t represent a systemic threat to the economy. And the White House concludes that many of these borrowers would still be suffering financially even without student debt, suggesting other factors are holding them down.

To highlight this divide, the White House points out that borrowers owing the smallest balances are the ones most likely to default. Take the cohort of borrowers who were first required to start making payments on their debt in 2011. Two-thirds of those who defaulted in the following three years owed less than $10,000, the White House says. More than a third of defaulters, 35%, owed less than $5,000. These borrowers owe little because they typically attended college for one or two years and then dropped out.

It seems like the just thing to do is to help indebted dropouts, regardless of whether they represent a “systemic threat” to economic stability. I don’t think it’s right to give a damn about whether “these borrowers would still be suffering financially even without student debt.”

It seems straightforward enough that we should offer a clean financial slate to those who walked away from college without a degree.

If they’re the least indebted cohort, and also the most likely to be harmed day-to-day by that debt, why not offer them a clean slate?

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