Time to Bring Bankruptcy Back for Student Loan Debt
Thanks to some misguided moral philosophy and some excellent lobbying work, it is now almost impossible to discharge your student loans in bankruptcy. They haunt you forever, like the souls of those you've killed. As our national student loan debt balloons further into crisis territory, it become ever clearer that we need to change that rule.
The latest figures show that about one in nine student loans are now 90 days delinquent or more. (And delinquency rates in general are much higher.) Total student debt sits at about $1 trillion, more than either auto loans or credit card debt. The issue so consumes the middle class—from parents planning to pay for their children's college all the way down to debt-wracked recent graduates— that Barack Obama is setting off on a "bus tour" to tout his plans for making college more affordable.
One way, of course, would be to bring down the ever-rising price tag of college tuition. That process, which will be driven by good old-fashioned supply and demand and customer outrage and increased appropriations from broke-ass state governments, will not happen overnight. In the meantime—for the millions of people who are already laboring under loads of student debt—it would be nice to allow for a sober and responsible route into bankruptcy for student loan debt, just like there is for other kinds of debt. (If you are the debtor, where your debt came from is less important than the fact that it is crippling you.)
That's exactly what the Center for American Progress calls for in a new report: reasonable standards to ensure that student loans can probably be repaid, combined with bankruptcy eligibility for those loans that will be the hardest to repay.
The way to approach this issue, however, is to establish clear and public standards for what we at the Center for American Progress refer to as Qualified Student Loans, or loans that cannot be easily discharged in bankruptcy, which has been done for other types of financial products as a way to identify safer financial products. Qualified Student Loans would include loans, both federal and private, that have reasonable repayment conditions such as low interest rates and access to favorable forbearance, deferment, and income-based repayment options. These loans would also be qualified based on the successful track records of the institutions and programs receiving the proceeds as a way to ensure that these are programs that—by virtue of their graduate employment rates—give graduates a reasonable chance to repay. Loans not meeting both standards—borrower-friendly terms and some evidence that graduates, based on their employability, are likely going to be able to repay these loans—would be eligible for discharge in bankruptcy just as credit cards are.
It's a fairly moderate step. And it makes sense. It would be viciously opposed in Congress, no doubt. But unless Obama produces a magic wand during the course of his bus tour, lawmakers will have to do something soon, or student loan holders will just keep doing more and more of the only thing they can do themselves: default.