Dan Kadlec of Time Magazine writes that creative solutions are needed. But how can we start?

Rortybomb‘s Mike Konczal has an idea: roll back the bankruptcy protections provided to student loan creditors. As we’ve posted before, student loans used to be dischargeable in bankruptcy, but over the past twenty years, Congress has passed laws that severely limit dischargeability. The reasons for doing so are ostensibly to benefit students: nondischargeability lowers interests rates (because creditors write-off fewer loans due to bankruptcy) and prevents students from abusing the system by declaring bankruptcy right after graduation.

So Konczal advocates going back to the 1989 laws on student loans: government, nonprofit student loans would not be dischargeable for the first five years, but private loans would be dischargeable. The five-year period prevents students from taking advantage of the system while at the same time providing a release valve for students who simply cannot afford to pay their loans.

Konczal also advocates lowering the interest rate on student loans to essentially zero. While the world’s great vampire-squid wrapped around the face of humanity, Goldman Sachs, sucks money from the discount window of the Federal Reserve almost for free, graduates are stuck paying upwards of 8.5% on federally backed student loans. The banks are too big to fail, but America’s future is? As Konczal advoactes:

Mass refinance all student loans into the current low rates the financial sector enjoys. This would give the 99% of Americans just a hint of the kind of total government support places like Goldman Sachs have gotten.

That’s real student loan reform. What say you, readers?

The New York Federal Reserve, after revising its August 2011 calculation of outstanding student loan debt from $550 billion to $845 billion–an increase of 53.7 percent.

Yeh is ahead of his time. He sees how debt has robbed graduates of economic prosperity. From the Associated Press:

“I see a lot of my friends who took out student loans, then they graduated and because of the economy right now they still couldn’t find a job,” said the third-year student [Yeh], whose parents both lost their jobs in 2009 and who grew up in the boom-and-bust town of Victorville, Calif., on a block with several houses in foreclosure. “The debt burden is really heavy on them.”

Students like Yeh worry educators. They fear that if students don’t take out loans, they can’t raise tuition. And if they can’t raise tuition, they can’t raise their own salaries. Or provide luxurious campuses that resemble country clubs. But educators don’t say that. Instead, they frame their fears as worry for students. They’re worried that students won’t graduate unless they live the student-loan-funded easy life. They’ll “trade down” and go to cheaper, less-prestigious schools. The horrors!

Please.

Education has become a business. And while schools like UC Berkeley don’t have shareholders, they do have administrators who make bank. And the more tuition dollars the schools pull in, the greater the bank. When those tuition dollars flee, so do the fat six-figure salaries. Educators have a reason to be worried, but it’s not for students’ well beings. It’s the money:

New borrowing nearly flattened out last year, according to the College Board, and actually declined on a per-student basis after accounting for inflation. Private borrowing (generally more dangerous to students) has dropped from about $24 billion in 2007-2008 to about $8 billion last year. A major factor is likely increased federal grant aid. But another may be students making more sacrifices to avoid loans.

That’s a pretty key figure: a decline in private borrowing by $16 billion. Federal grant aid has been increased slightly, but it hasn’t been increased by that amount. To my surprise, students have started to realize that taking out student loans to attend the gold-encrusted ivory tower of their choice isn’t always the best idea. I think we’re starting to see the wave of the future. And Yeh is the first to ride that wave.

Americans for Prosperity Texas Blog. Try $1 trillion. Should be about 1,000 times more shocking.

Interest will now accrue on all federal loans to graduate students instead of on two-thirds of those loans. The availability of loans won’t be affected. The issue is that when borrowers leave school, unless they have paid interest while in school, students will owe more than they otherwise would have. A student who borrowed the 2009-10 averaged subsidized amount of $7,171 at the beginning of each of two years of graduate school would owe about $15,838 instead of $14,342 based on 6.8% compounding interest. She would face monthly payments of $182 instead of $165 over a 10-year standard repayment period.

So, let’s do the math. Over ten years, students will pay $2,040 more in interest. And that’s just for two-year graduate programs. What about law students and med students?

Students who are in school for longer periods of time–including most medical and law students–will lose a bigger benefit. For those in shorter graduate programs, the subsidy matters less.

The government just raised every graduate student’s tuition a few thousand more dollars (in addition to the thousands that the schools will raise it next year). Of course, for law students and med students, $2,000 is a drop in the bucket compared to the overall cost of attendance.

*The figures in CHE’s story are inaccurate. For the 2009-10 academic year, graduate students took out $25.3 billion, not million, in Stafford loans.