Did you hear Dick Durbin’s latest brilliant idea? Now he wants to make private student loan debt dischargeable in bankruptcy. “There is no reason why private student loans should get treated differently from other private debt in bankruptcy.” Durbin said at a congressional hearing last week, American Banker reports. “In many respects, private student loans are just like credit cards—except unlike credit card debt, private student loan debt cannot be discharged in bankruptcy.”
If Durbin keeps this up, eventually there won’t be a banking industry for him to torment. His student-loan proposal is a terrible idea. Durbin's nutty statement above notwithstanding, private student loan debt is not like credit card debt. Card lenders have substantial flexibility in changing the terms of their loans—notably, by raising and lowering lending limits—as the balances age and the borrower’s circumstances change. In the case of student borrowers in particular, lenders often grant a low limit initially and then increase it as the borrower establishes a reliable payment history.
Student lending is of course nothing like that. The initial loan balances are much larger than they are with cards, for starters. And the borrower doesn’t begin to repay them until he’s earned his degree, four years hence. The lender thus has no idea which of its credits are good and which are bad until it has already loaned them, in many cases, tens of thousands of dollars.
All of which is to say, education lending is an awfully risky business. The New York Fed reports, for instance, that fully 25% of the $870 billion of outstanding student debt is delinquent. So it’s not for no reason that Congress decided to make student loans undischargeable in the first place.
But if Sen. Durbin gets his way and borrowers have the option to have their debts wiped clean, the risk to lenders will go up even more—which in turn will mean higher rates for borrowers. Credit would dry up entirely for borrowers who couldn’t muster up a co-signer.
You’ll get no argument from me that that $870 billion in student loan debt is a huge burden, much of it on the backs of people who are least able to service it. If Congress wants to have a start at fixing the problem, one place it might begin is by looking at ways to slow tuition inflation. (Another fun idea: put colleges themselves on the hook for a portion of unpaid private balances. That would concentrate the minds of admissions departments across the country. It would likely cut down on the availability of, say, majors in Peace Studies as well.) But allowing current borrowers to get off the hook would only make private student loans scarcer and more expensive. I doubt that’s the outcome Sen. Durbin has in mind.
What do you think? Let me know!