Lunacy on Loans and Licensing

Student loan debt is one of the greatest burdens facing young Americans. Over 44 million borrowers, myself included, owe a combined $1.5 trillion. Student loan debt has grown to become the second largest category of consumer debt, behind only mortgage debt.

While this amount of debt has a significant impact on economic decision-making, many are also struggling to repay their loans. Currently, 8.9 million borrowers have loans in default, and if the trends continue within the next 4 years the number of borrowers at risk of defaulting on their student loans is expected to double.

Beginning a career with this level of student loan debt can make it extremely difficult to buy a house, start a business, and even start a family. As we know, student loan debt is the greatest obstacle preventing millennials from buying their own homes besides avocado toast.

Student loan debt does more than just make your paycheck lighter: if your job requires an occupational license, in some states it could cost you your job.

Several states have laws in place giving them the authority to strip individuals of their occupational license if they fall behind on their student loan payments. States adopted these laws requiring licensing boards to revoke professional licenses in order to give borrowers an incentive to remain current on student loans payments. These laws were passed in the 1980s and 1990s, at the encouragement of the U.S. Department of Education, when defaulting on student loans was becoming more common.

In a recent article, The New York Times found that at least 8,700 licenses were revoked in recent years, but that likely understates the number. From 2012 through 2017, the Department of Education reported 5,000 professionals to licensing boards for defaulting on their loans in the state of Tennessee alone. Most states do not keep a count of the number of licenses revoked, leaving it up to the numerous state boards who may or may not report them.

By revoking the license of professionals defaulting on their student loans, these laws make it much more difficult for them to repay those loans. By effectively banning people from working in professions for which they have education, training, and experience, these laws force them into fields in which they are much less qualified to work. Additionally, professionals who work in an occupation that require a license earn a premium over similar, non-licensed occupations.

In addition to hurting the professionals who struggle to pay back their student loans, it makes consumers worse off, because it removes qualified professionals from the market. While in theory licensing exists to protect consumers, these laws do nothing to help ensure quality in the profession. Poor money management does not make someone a substandard nurse.

Supporters claim the purpose of these punishments is to provide a strong incentive for borrowers to avoid default and that they protect the taxpayers’ interests. While it may be true in theory, in practice it is counterproductive. People who are struggling to pay their student loan debt and lose their jobs are much more likely to turn to credit card debt or government assistance to make ends meet. The first option only pushes professionals further into debt, the other leaves the taxpayer on the hook anyway.

No one is arguing in favor of delinquency on student loans. Laws that encourage or incentivize repaying loans are good in theory, but however good ideas look on the chalkboard, in real life they may be ineffective and cause serious problems. This is a perfect example. Designing policies to encourage student loan repayment is difficult, because unlike physical assets such as a house or car, you cannot repossess all of those classes, late nights studying, and parties at the Theta house.

The good news is that the number of states that revoke licenses for student loan delinquency has fallen from around half in 2010 to only a handful today. Just this year Arkansas, Iowa, Kentucky, Louisiana, and Texas enacted laws ending the practice. This even enjoys bipartisan support in Congress. In 2018, Marco Rubio and Elizabeth Warren, who are not often in agreement, cosponsored a bill to prevent states from revoking occupational licenses over unpaid federal student loans.

Student loan debt is a burden shared by many young people. As student loan debt grows, it has a greater impact on our lives and defaults become more economically significant. Stripping licenses from those of us who fall behind is self-defeating, because it makes the repayment of those loans much more difficult. Many states have wisely realized this inherent problem and repealed these laws, and hopefully the few remaining holdouts will join in removing these harmful laws.

Conor Norris is a Catalyst Policy Fellow and a Research Analyst with the Knee Center for the Study of Occupational Regulation (CSOR) at Saint Francis University. His areas of interest include occupational licensing and health care scope of practice laws, monetary policy, and long-run growth. Conor is an alumnus of the Mercatus Center MA Fellowship at George Mason University, where he received his MA in economics in 2018. He interned at the Cato Institute in 2017 in the Center for Monetary and Financial Alternatives. He loves reading good history books and bad puns and is still bitter that the Star Wars expanded universe is no longer cannon. Conor grew up in Williamsport, Pennsylvania and after spending two years in Arlington, Virginia, he now lives in Altoona, PA.
Catalyst articles by Conor Norris