Student loans: Is petition to forgive debt completely a good idea?

Students and parents will think so. But blanket amnesty for all student loans could destroy the student-loan system and might not do much to address the underlying problem. 

Large numbers tend to get people’s attention, especially the 13-digit kind. So now with news that student college debt is hitting the $1,000,000,000,000 mark, everyone seems to be talking about it.

President Obama wants to delay the interest-rate hike on government-backed student loans scheduled for this July and will say so in his Saturday radio address – and then again when he hits college campuses next week to promote the plan. For their part, Department of Education officials stood up for the plan on Friday. And April 25, the Occupy movement is set to occupy colleges to highlight the issue. 

But an online petition that has gathered nearly 700,000 signatures has a better idea – erase the debt completely, says creator Robert Applebaum.

“Forgiving the student loan debt of all Americans will have an immediate stimulative effect on our economy," he says in the petition. "With the stroke of the president's pen, millions of Americans would suddenly have hundreds, or in some cases, thousands of extra dollars in their pockets each and every month to spend on ailing sectors of the economy."

Forgiving student loan debt, he adds, “rather than tax cuts for corporations, millionaires, and billionaires, has a much greater chance of helping to raise [the economic] tide in a much shorter time-frame.”

But while the idea has certainly gotten the ear of beleaguered grads – and their families – erasing a trillion dollars of debt by presidential fiat could destroy the future of college loans while doing nothing to address the underlying problem, economists and financial experts say.

Regardless of whether the loan is a government or private loan, forgiveness will mean someone loses. Either the taxpayers in aggregate in the case of federal loans or private lenders on private loans

“Who in their right mind, A) would make loans to students if the loans can be forgiven later on? Or B) invest in an income trust vehicle where the asset of the investment can disappear due to 'forgiveness?' ” says Kevin Worthley, a certified financial planner in Rhode Island and a specialist in college financial strategies, via e-mail. 

Even if there were lenders willing to risk their money, “the interest rate they would rightfully require for the risk incurred may likely be far more than future students would be willing to pay and cries of 'usury' to the government could result,” he adds.

Credit is fundamentally based upon trust, agrees Mitchell Weiss, adjunct professor at the University of Hartford's Barney School of Business in Connecticut.

“If I loan you some money, I trust that you’re going to pay it back to me,” he says. “Wholesale forgiveness, amnesty – whatever you want to call it – will fundamentally undermine a process that is thoroughly integrated within our society.” 

Moreover, it doesn't really solve the problem, says Professor Weiss.

“Students need better financial tools," says Weiss, the author of “Life Happens,” a textbook for student financial planning. "But the laws need to be adjusted as well, Bankruptcy laws need to be amended."

A 2005 change in bankruptcy law means that "education loans are not dischargeable in bankruptcy except in cases of undue hardship.” This, he says, "is really tough to prove.”

Loosening the law would give lenders and ex-students more leeway to find compromises, he says. 

“When a lender knows that the person that’s sitting on the other side of the table has the ability to pull the plug by declaring bankruptcy, and ... that lender doesn’t have collateral to foreclose upon in order to make itself whole, then that lender is pretty motivated to find a compromise solution to avoid the loss that would surely follow,” he says. 

Will the petition make any difference?

Possibly, says Lindsay Hoffman, communication professor at the University of Delaware. Online social media has the ability to reverse the relationship between the government and the governed, she notes.

“Politicians used to set out what they thought was important and voters would respond,” she says, but “what we are seeing here is a reversal of the agenda-setting process.”

Increasingly powerful social media tools such as this online petition have the power to “set the agenda and politicians respond to those collective voices being raised.”

"That,” she says, “is something new.”

Indeed, the political action group Moveon.org has picked up on the momentum behind Mr. Applebaum's original petition to funnel support to a bill now before Congress, the Student Loan Forgiveness Act of 2012, which would help students with loans – though it is not a complete amnesty.