Be skeptical and don’t get sucked into disinformation.
Ultimately, the goal of any news organization is to create interest in information that it writes so that people consume articles. You’ll notice that your financial education and future are no where to be found in that equation. This isn’t to say that the media is out to get you or that wisdom cannot be gleaned from reading the news. However, if you don’t read stories with a skeptical eye, you’ll accept solutions presented that lead you astray.
The story entitled “Student loans seen as potential ‘next debt bomb’ for US economy” is about growing student loan debt and its similarity to the recent housing bubble. The article is based off of research released by the National Association of Consumer Bankruptcy Attorneys (NACBA). Both publications provide some good information and insights into the higher education lending industry and practices like the increase in total student loan debt and bankruptcy implications of student loans. All of this is very concerning, but then I get to the part on where we solve this problem and start to get that, “your selling me something” feeling.
The article descends into the need to reform the bankruptcy code to allow for student loan debt to be discharged. Attention is also given to lenders that charge fees for forbearance. If you were to read the full NACBA report, the conclusion is even more brazen in advocacy for bankruptcy code reform to allow student loan discharge.
The problem? Discharge of student loan debt in bankruptcy has nothing to do with deflating an asset bubble and if anything, would make the situation worse.
What Happens in an Asset Bubble Collapse?
An asset bubble occurs when too much credit is extended to purchase items that are overpriced. When the true overvaluation is realized, borrowers realize that they do not have the ability to cover the credit they received. As borrowers are unable to make payments, banks run out of cash and become distressed.
All of this sounds like a reasonable possibility for student loans. The overvaluation of an education leads to too much borrowing under student loan debt. When students realize that their after-college income is not enough to cover loan obligations, massive defaults occur and banks stop receiving the necessary loan payments needed to continue the lending cycle.
Why Student Loan Discharge isn’t the Answer?
The big problem with the article and NACBA report is that student loan discharge has no possibility of deflating a student loan bubble. The bubble causation is that demand and rising prices for tuition is leading to people to take out more in student loans. How is loan discharge going to impact those factors?
Odds are that while discharge would certainly ease debt burdens for students, it is more likely to create a bubble collapse than prevent one. Allowing student loans to fall under bankruptcy would make credit less risky for students. When there is less risk in taking out a loan, borrowing becomes more attractive. Thus, there will be more loans, not less.
Additionally, the problem with asset bubble collapse is that people stop making payments to banks. That’s precisely what a bankruptcy discharge does; forgives debt so that you don’t need to make payments to the bank. Discharge isn’t going to prevent something that it causes.
What effect would bankruptcy discharge have on a student loan bubble? If anything, it would make it worse. So how did two incongruent ideas get mashed together in a Washington Post article?
The Media Business
Media is nothing more than a business and in business you compete for some kind of gain. So, if there is an agenda to this article, it’s best to start by asking, who benefits by convincing people to support bankruptcy discharge of student loan debt. The answer is bankruptcy lawyers.
If student loans were discharged in bankruptcy, then the floodgates would open with new prospective bankruptcy clients. Those clients need lawyers to represent them. So if lawyers are the benefactors, how does their agenda make its way to the pages of the Washington Post?
Hopefully this does not come to you as a shock, but newspaper editors do not publish articles based on how useful the information is to your finances. No, they publish information that they think will be the most interesting to read. That means that if you wanted to publish your agenda in the newspaper, the best way would be to provide information in a context that would be interesting to read.
Thus, the NACBA spends money writing a report comparing student loans to the sub-prime mortgage crisis. The agenda is sold as the solution at the end of the report, even though it’s not really a solution. The only thing left to do for the organization is to send out a press release with a sensational slogan like “next debt bomb.” If you are good at sensationalizing titles the Washington Post editor will be interested, which means the reading public will be interested.
The Media Sham
What is shameful is how complicit the media is in all this. You see, they know that there is good information and salient points to be gleaned from reports such as the NACBA’s student loan report. However, instead of just reporting on the useful facts, you’ll note that they also report the agenda too.
Why? Was the reporter taken in by the report’s solution? Or, do organizations such as the NACBA provide easy access to information that is lucrative to newspaper? Not just useful information; free information. How does the paper pay for such valuable, reportable information? That’s where the NACBA’s agenda comes in. It’s quid pro quo. Mention the agenda and we’ll keep feeding you interesting information!
What to Get Out of This
I’m not trying to lambast the Washington Post or the NACBA for that matter. This is the way advocacy groups interact with the media and I’m not aware of anyone that is guiltless. Likewise, I’m not saying that a student loan bubble or bankruptcy discharge of those loans aren’t valid discussions. However, how much of the public is aware of the “I’ll scratch your back, you scratch my back” business behind obtaining and reporting information?
The point is that the media is the last person to tell you when there is an agenda to the information they are selling you. Also keep in mind that there is some very useful information that we as a media consumer can walk away with, but if you don’t understand the game, you’re likely to get fooled.