Time to Make College Loans Dischargeable

July 11, 2013 | Blog

This post has been revised following excellent additional information provided by Zakiya Smith of the Lumina Foundation and Rachel Fishman of the New America Foundation. Thanks!

Student debt is the worst possible form of debt in one critical way: it almost never leaves you.  You may be disabled, unemployed, or even dead, but you almost always still have to pay.

This “non-dischargeable”status is said to exist because there is no way to repossess the assets (your education) to pay off the creditors.  But that cannot be the only reason for this extreme rule. Instead, it’s another example of putting bankers’ needs above those of the average American.

Federal student loans technically can be discharged (while private loans cannot-ever) but it’s a very difficult process and almost no one does it. Among those seeking a discharge, about 40% are granted, but only 0.1% of student loan debtors filing for bankruptcy have sought to discharge their loans.  Those who do file and succeed are often poor, unemployed, and having medical problems.  It used to be the case that loans were much more readily dischargeable.  All student loans could be discharged in bankruptcy until 1976. Student loans could be discharged after a waiting period (of initially five and later seven years after repayment was scheduled to begin) until 1998. Federal student loans became nondischargeable in bankruptcy in 1998. Private student loans became nondischargeable in bankruptcy in 2005.   Why not work to once again make both private and federal loans (more) dischargeable?

The pros are obvious — students drowning in debt could declare bankruptcy and get a fresh start. Certainly their credit would be ruined for a few years, but since many aren’t trying to buy homes and it’s increasingly the case that it doesn’t hurt job prospects, this isn’t the end of the world. In addition, lenders might make credit less available, and I tend to think that will help to drive down the costs in higher education (yes, I partly agree with the Bennett Hypothesis).

The cons are less clear, if we put aside the powerful interests of the financial industry .  Would this give students incentive to go bankrupt? Recall that these are people who invested in postsecondary education and thus are actively trying to better their position in the world. They will not take bankruptcy likely, and those who treat it as anything less than a last resort will be a tiny minority (when bankruptcy was the same for student loans as all other loans, far less than 1% of federal loans were discharged this way). In fact, however, bankruptcy is critical in free market economies: it instills a sense of hope in the face of adversity.  In other words, there are both conservative and liberal rationales to support this effort.

So if we are not doing this, we have to admit that it’s because we aren’t brave enough to strong enough to stand up to the lenders.  An effort to make private student loans dischargeable again was introduced this year in the Fairness for Struggling Students Act and the Know Before You Owe Act and both failed.

Isn’t it time for a change?  Can’t we mobilize more broadly to advance this right now by pursuing reform in the Senate judiciary committee?

1 Comment

  1. Reply

    Maxwell

    July 11, 2013

    Yep and I think the US Student Association should make this central in HEA re-authorization.


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