Why Student Loan Holders don’t need a Bailout – No

In light of the U.S. economic crisis and the myriad of government bailouts for banks and industries over the past few years, it’s tempting to suggest that the government also bail out student loan holders unable to pay, given many graudates are struggling to find and keep work, let alone pay off tens of thousands of dollars in loan debt.

But this belies the differences in scope between the two problems.  First of all, the reason the U.S. Government even considered bailouts for struggling banks was because the failure of these banks threatened the nation’s economy. The failures of IndyMac and Washington Mutual by themselves threatened the well-being of the nation’s economy. With several other banks, even some of the biggest and seemingly more stable U.S. banks, on shaky ground, the government believed that doing nothing could result in a total economic collapse that could ruin most of our lives. A resulting depression could take decades to recover from.

However, a student loan is simply an arrangement between a bank and an individual. With the bad mortgages involved in the TARP bailout, individuals with said mortgages had already defaulted or filed for bankruptcy. The banks were left holding the bag for hundreds of thousands of dollars in debt per debtor, and the collection of bad debt threatens the welfare of entire banks and threatens a subsequent economic chain reaction.

Compare this to student loans, which sometimes top the $60,000 mark but are often lower. The interest is comparatively low and usually charges at a fixed rate. The debt payment schedule typically goes about 10-20 years (compared to 30 for mortgages). In many cases, banks will work with the debtor to rearrange payment plans to ease the burden if necessary. And whereas a vast majority of Americans own a home, a much smaller proportion (those who financed a college education) holds these smaller student loans.

Most student loans eventually get paid off one way or another. Only in extreme cases, such as where the debtor took out a large amount of debt and did not parlay the loan into a degree and well paying job, is the debtor truly unable to pay at all. Banks can eat the handful of cases where they cannot get paid off.

The U.S. only pursued a bank bailout because the consequences of not doing so appeared dire for the entire nation. Many mortgages didn’t or won’t get paid, and the banks overloaded with these large, failed loans. While the merit of bailing out banks which contributed directly to their own mess is debatable… this does not justify a Federal effort to bail out individuals that cannot pay their student loans.  The scope of student loan financing is far smaller, affects fewer individuals and the failure of those lending institutions isn’t seen as likely, let alone a threat to the U.S. economy.