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In light of the proposed $700 billion bailout, it's tempting to entertain the idea that the government should bail out student loan holders unable to pay. But this belies the differences in scope between the two problems.

First of all, the reason the U.S. Government even considered a $700 billion bailout for struggling banks was because the failure of these banks threatened the nation's economy. The failure of IndyMac and Washington Mutual by themselves threatened the well-being of the nation's economy. With several other banks teetering, and even some of the more stable U.S. banks on shaky ground, doing nothing could result in dire economic consequences that could ruin most of our lives. If the United States Government allows enough of these banks to fail, the result could cripple the entire nation's economy. The resulting depression could take decades to recover from.

However, a student loan is simply an arrangement between a bank and an individual. With the bad mortgages involved in the bailout, those individuals with said mortgages have already defaulted or filed for bankruptcy. The banks are left holding the bag for hundreds of thousands of dollars in debt per debtor, and the collection of bad debt threatens the welfare of entire banks and threatens a subsequent economic chain reaction.

Compare this to student loans, which sometimes top the $60,000 mark. The interest is comparatively low. The debt payment schedule typically goes about 10 years (compared to 30 for mortgages). In many cases, banks work with the debtor to rearrange payment plans to ease the burden if necessary. And whereas a vast majority of Americans own a home, a much smaller proportion holds these smaller student loans.

Most student loans eventually get paid off. Only in extreme cases, such as where the debtor took out a large amount of debt and did not parlay the loan into a degree and well paying job, is the debtor truly unable to pay at all. Banks can eat the handful of cases where they cannot get paid off.

The U.S. only pursued a bank bailout because the consequences of not doing so could prove dire for the entire nation. Many mortgages didn't or won't get paid, and the banks overloaded with these large, failed loans. While the merit of bailing out banks that contributed directly to their own mess is debatable... this does not justify a Federal effort to bail out individuals that cannot pay their student loans. Bailouts are meant for institutions whose failure threatens the nation... not for individuals who can't pay off a loan.

Learn more about this author, Steven Gomez.
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