Democrats in the Senate propose yet another giveaway:
President Barack Obama on Tuesday floated the idea of making it easier for student borrowers to get rid of some of their student debt through the bankruptcy process.
Thirteen Democrats in the Senate acted on that suggestion Thursday when they introduced a bill dubbed the Fairness for Struggling Students Act of 2015 that will treat student loans issued by private banks the same as other types of private unsecured debt in bankruptcy proceedings. [Emph. added]
Considering that the bill is being co-sponsored by the likes of Elizabeth Warren and Richard Blumenthal, you won’t be surprised that I think it’s a terrible idea. Which it is. Private student lenders underwrite on the basis that their loans can never, ever be discharged in bankruptcy. Changing the rules after the fact would be incredibly unfair, not to mention a financial disaster for lenders. Student loans are different from other loans in an important way: the borrowers needn’t service them for many years after origination—that is, for as long as the borrower is still in school, earning his degree. Under the Democrats’ proposal, then, nothing would prevent student borrowers from declaring bankruptcy the moment they graduate. In fact, that used to happen all the time, which is why Congress changed the bankruptcy law in 1978 to make federal student loans non-dischargeable, and then changed it again in 2005 to protect private student loans. Going back to the old rules would be moral hazard on steroids.
All that said, student loans can be a huge burden at a time in people’s lives when they’re at their most financially vulnerable. People can get into dire financial straits through no fault of their own, and can deserve relief. When that happens, why not make student debt dischargeable under certain circumstances? I’d be all for that–with the following provisos:
- Borrowers shouldn’t be allowed have their student debt considered in a bankruptcy for some set period after graduation, say ten years. After that, it would be eligible for forgiveness along with other types of loans.
- Make the institution that granted the borrower’s degree a co-guarantor for some portion of the debt. I’d say 20%, but am amenable to counteroffers. Putting colleges on the hook for student loans would make them more judicious in judging applications, and likely improve their pedagogy, as well.
- Why just private student loans? Have the federal government begin actively, prudently underwriting student loans (rather than its current practice of simply handing out money to all comers), and make federal student loans dischargeable in bankruptcy, too.
- Point 3, above, is of course preposterous. Government lending can never be properly underwritten for risk or de-politicized, which the legacies of Fannie, Freddie, the FHA, and the SBA, among others, have all proven. Better to get the federal government out of the business of direct student lending entirely. That would at least eliminate a potent driver of tuition inflation.
- All this would apply to only loans written after the rules are changed. Existing borrowers are stuck. Sorry.
These all strike me as reasonable and (except for my Point 4) politically doable. This is one area where Democrats and Republicans could reach some sort of agreement. It would be interesting to see them try.
What do you think? Let me know!