Via Suzy Khimm, Federal Reserve data shows the skyrocketing delinquency rate of student loans:
But there’s something special about student loans. Two things, in fact. If you default on your mortgage, the bank gets to take your house. Same thing with an auto loan. And if you can’t pay your credit card bill, you can discharge the debt in bankruptcy. But the lender can’t repossess your degree, and the 2005 bankruptcy bill made it impossible to discharge the debt. So if the labor market recovers in two or three years, we’re going to have a huge cohort of people who’ve been unemployed or underemployed and got delinquent on their loans put into a kind of debt peonage situation where modest increases in wages are clawed back by the need to repay all this old debt.
Fair enough, you might say, they did take out the loans. But the standard penalty for taking out a loan you can’t repay is that you declare bankruptcy and become a bad credit risk in the future. That’s not just a way of being nice, it’s a policy response to the fact that forward-looking and backward-looking penalties have different impacts. If past debt makes it harder for you to get a loan today, that has no impact on your incentives to work — it just means you have to be thrifty. But if past debt makes it harder for you to increase your disposable income, it works like a tax that depresses workforce participation.
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