Dear Reader,

Student loans are becoming one of the biggest political fights in Washington again.

The Trump administration has been pretty blunt about where it stands.

Its policy is simple:

“If you take out a loan, you must pay it back.”

Those on the left – like Bernie Sanders – (predictably) see things a little differently.

After the government moved toward collecting decades-old student debt from seniors’ Social Security checks, he called the idea “beyond unacceptable.”

So we have two familiar sides.

One says – you borrowed the money, so pay it back.

The other says – millions of Americans are buried under debt they can’t afford, so give them relief.

Personally, I’m in support of the former.

But that’s not what today’s newsletter is about.

Instead, for today, I want to propose a very simple fix that I believe could nip the entire student loan problem in the bud…

While simultaneously tackling the surging price of college degrees.

Before I get into that, let’s dive a little into how we got here in the first place.

How did we manage to reach a point where we have roughly $1.7 trillion in non-dischargeable federal student loans spread across more than 42 million borrowers…

With 10.6% of outstanding balances now at least 90 days delinquent?

It All Started With the Soviets

After the Soviet Union launched Sputnik in 1957, Washington became worried that America was falling behind in science and technology.

So Congress passed the Higher Education Act of 1965, which created the Guaranteed Student Loan Program.

The logic was understandable.

Banks were reluctant to lend huge sums to young people with no collateral or proven earning power.

So Washington stepped in to help absorb the risk.

That made loans easier to get.

But it created a potential moral hazard. Specifically:

What is stopping someone from borrowing for say, medical school…

Graduating with few assets…

Declaring bankruptcy…

And then starting a lucrative career debt-free?

That was one of the fears Congress raised in the 1970s.

So in 1976, Washington made government-backed student loans harder to discharge in bankruptcy.

But what most people don’t realize is that the original restriction only lasted five years.

After that, the loan could generally be treated like other debt in bankruptcy.

The idea was essentially:

Don’t let someone borrow a fortune and wipe it away immediately…

But don’t trap them forever either.

The problem is that in trying to fix one flawed incentive…

Washington eventually created another.

Because as time went on…

We Kept Expanding the Loans – While Tightening the Escape Hatch

In 1990, five years became seven.

In 1998, Congress removed the time limit entirely.

Then in 2005, special bankruptcy treatment expanded to qualifying private student loans too.

At the same time, borrowing became much easier.

Graduate students eventually gained access to loans covering up to the full cost of attendance.

And by 2010, Washington itself had become the dominant lender through the federal Direct Loan Program.

Think about the transformation.

The bankruptcy restriction was created in an era when the federal student-loan market was much smaller…

Where banks were still originating most guaranteed loans…

And the restriction itself expired after five years.

Today, the federal government itself dominates the lending market…

Borrowers can accumulate enormous balances…

And there is no point where simply waiting long enough makes those loans normally dischargeable.

In other words…

We dramatically expanded the system’s ability to create debt…

While making that debt progressively harder to escape.

And in the process, we stripped away many of the incentives that normally keep lenders, borrowers, and sellers disciplined.

That’s why, I believe the simplest solution to this whole debacle is to:

Let Bad Loans Fail Again

Treat student loans much more like other debts in bankruptcy.

First, that gives people in truly desperate situations an escape hatch.

And it won’t mean that all 42 million people with student loans right now will suddenly declare bankruptcy.

After all, bankruptcy has consequences.

If you’re making good money and can comfortably repay your loan, destroying your credit to escape it probably makes no sense.

But somebody genuinely buried under a loan they have little realistic prospect of repaying gets a way to eventually start over.

And unlike blanket forgiveness, bankruptcy naturally imposes a cost on the borrower too.

But the biggest change would happen BEFORE the next loan is made.

Because once a loan can actually fail…

Someone suddenly has to care whether it was a good loan in the first place.

That’s what market discipline really is.

The possibility of losing money gives everyone involved an incentive to make better decisions before the money ever changes hands.

Maybe lenders become less willing to finance a $150,000 degree with terrible earnings outcomes…

Maybe Washington becomes more careful about how much it lends for different programs.

And once less easy money is available to pay for college…

Colleges Would Have To Respond Too

You see, one reason that college degrees are so expensive nowadays is because of the easy availability of all this student loan money.

New York Fed researchers found that colleges raised sticker tuition by about 60 cents for every additional $1 of subsidized federal borrowing capacity.

And when Grad PLUS effectively uncapped graduate borrowing, researchers found net tuition rose about 64 cents for every additional federal loan dollar.

If students can borrow more, colleges can charge more.

But if students can suddenly borrow less money, universities can’t keep raising tuition simply because the financing is there.

They either have to lower their prices…

Cut administrative bloat…

Or convince students that what they’re selling is actually worth the cost.

And the programs with the weakest economic value would get hit first.

If a degree costs $100,000 but gives graduates almost no realistic chance of earning enough to justify that price…

It becomes much harder to find somebody willing to finance it.

That means fewer low-value degrees being pushed on naive 18-year-olds…

And more pressure on schools to focus on education that actually produces a return.

At the same time, the degrees that do provide real economic value would still have demand.

Engineering. Medicine. Accounting. Law. Computer Science.

Skilled professions where the education clearly increases someone’s earning power.

And if schools have to compete for students who can no longer borrow virtually unlimited amounts…

It would put downward pressure on the price of college itself…

And it would force schools to compete on something they should have been competing on all along:

Is this education actually worth what we’re charging for it?

And yes…

Some students would probably find it harder to borrow enormous sums for college.

But I’m not convinced that’s actually a problem.

Because that difficulty is itself a market signal.

It tells us that somebody, somewhere, doesn’t think the education is worth the amount being borrowed to buy it.

Remember, the goal shouldn’t be to make sure everyone can borrow whatever a university wants to charge.

The goal should be to make education affordable enough – and valuable enough – that financing it makes economic sense for everybody involved.

To its credit, the Trump administration is already trying to crack down on low-value degrees by requiring programs to show their graduates actually earn more.