Home > Student Loans > The Ethics & Immorality of the Federal Student Loan System

Comments 2 Comments

Is it possible for something to be ethical but immoral at the same time?

Like most people, my students—to whom I ask this question every semester—don’t believe so, because they use the words interchangeably. That is, until my query inspires them to think about it on a deeper level.

An action is ethical if it is both legally permissible and a generally accepted practice. That same action is moral as long as it’s consistent with one’s personal set of values.

The individual meanings of the two words are often conflated because we’re inclined to believe that the two philosophical concepts are compatible: if it’s not against the law and everyone is doing it, it must be OK.

Not necessarily, as the federal student loan program illustrates.

Consider the credit underwriting process—or, rather, the absence of one. Although lending without regard for a borrower’s financial ability to repay his or her loan may be a legal and generally accepted practice (because that’s the way the student loan program was established long ago, and certain other financial products are similarly structured as well), one may also argue that it’s immoral too because that disregard has the potential to entrap as easily as it entices.

The program’s fundamental pricing methodology is equally at odds with itself.

When Congress passed the Bipartisan Student Loan Certainty Act of 2013, it pegged a hierarchy of interest rate markups for the various student loan programs (e.g., Federal Direct and PLUS) to a particular financial instrument (10-year Treasury Notes, in this instance). Yet the government funds its program with much lower-cost, shorter-term Treasury Notes—perhaps as short as one and three months in duration—and pockets the difference. And Congress widened that disparity by mandating an added hierarchy of upfront fees, whose values are a multiple of the cost of originating and administering these loans.

Legal? Sure. After all, the bill was passed by overwhelming bipartisan majority and signed into law by the President. A generally accepted practice? Yup. One needn’t look any further than your local bank for that. But is it moral?

Only if you’re OK with turning a profit on the backs of your own children.

Then there is the matter of loan structure. The various government repayment plans all span 10 years. Although that too is legally permissible and a generally accepted practice among higher-education lenders, an argument could be made that the standard term is immoral because it disregards a borrower’s financial capacity to meet his or her obligation in the time allotted.

In fact, after taking into account the current average size of these debts, the plain truth is that more borrowers would be helped if the repayment durations on all outstanding loans were doubled (to a maximum 20-year term) than if the interest rates were reduced—even to 0%.

Last, there is the inability to discharge these loans in bankruptcy court. In the mid-1970s, Congress exempted federal student loans from this consumer protection to safeguard taxpayers from egregious abuses that were making news at that time—reports that were later discredited. In 2005, the same consideration was extended to private student lenders, which lobbied for parity with the government program.

Although a borrower’s inability to evade this category of debt (except under extreme circumstances) is now both legal and generally accepted, if the basis for the enabling legislation is flawed and if a borrower is consequentially prevented from seeking the same protection from the courts as he may for any other consumer loan (which puts him at a serious disadvantage with his creditors), it’s hard not to conclude that the inability to discharge student loan debts in bankruptcy is immoral.

The federal loan program presents a classic example of how morality is sidelined when the two concepts collide and money is at stake.

Consider how the profits that are generated by the various government loan programs flow into the general fund: The surplus dollars end up offsetting an equal portion of the national debt.

Think of how untethered borrowing limits facilitate the continued expansion of a higher education industry that many believe to be overbuilt. And how the intensive administrative work that is a direct result of the program’s unreasonably short repayment term and indefensibly high pricing scheme support a multi-billion dollar, private sector loan-servicing industry.

There’s not a lot of talk about much of this. Nor is there about how the federal loan program’s deficiencies have set up debtors to be victimized by lending institutions in other sectors.

Take, for instance, those who are struggling to make ends meet—which constitutes nearly half of all higher-education borrowers whose loans are either delinquent, in forbearance or are otherwise being accommodated by some sort of relief arrangement. They are increasingly turning to online lending solutions to tide them over until the next paycheck. But because of the exceedingly short duration of their payday, account-advance or bill-pay loan, borrowers with chronic cash flow problems are often compelled by circumstance to rollover that same high-priced debt over and over again.

The proliferation of these so-called alternative financial products represents yet another example of something that is legally permissible, generally accepted and, at the same time, disturbingly immoral.

We often hear those whose professional or personal actions end up challenged in the court of public opinion attempt to defend the decisions they’ve made by pleading, “I didn’t do anything illegal!”

The follow up question to that should be, “But was it the right thing to do?”

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

More on Student Loans:

Image: Wavebreakmedia

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • NZ Brooklyn

    Interesting article, but you state that all student loan repayment plans are on a 10 year term. You didn’t mention Income-based Repayment, Pay-As-You-Earn, or REpaye, all of which have terms up to 20 or 25 years, with lower monthly payments for low-to-mid salaried borrowers, and with federal loan forgiveness at the end of the term (20 or 25 years). Of course, the amount of accrued interest is signficantly higher, so the loan principal will be much higher if the borrower earns a high enough salary that their Income-Driven plan payment is equal to their standard repayment plan. However, the IDR plans are a relief for borrowers with lower incomes.

    • Lil25

      we’re struggling and we don’t qualify for IDR. Cost of living is too damn high any place there are tech industry jobs. No job = difficulty repaying loans. Good job + insanely high rents = difficulty repaying loans. We just can’t win. Also, why the hell are grad school interest rates so high!?

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team