Debate Club

Private Loans Without Bankruptcy Option Are the Real Problem

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The Obama administration and Congress should be applauded for trying to ease the debt burden on student loan borrowers. However, extending the 3.4 percent student loan interest rate will help those taking on new loans but do nothing to help those who are already drowning in student loan debt. If policymakers want to make a real difference, they should make it possible for financially distressed borrowers to discharge private student loan debt like other types of debt.

[See a collection of political cartoons on the economy.]

Private student loans are an oft-ignored part of the student debt problem, since they are often conflated with federal loans. But private students loans are almost always more expensive than and lack the protections of federal loans. Financing your education with private loans is not much different from financing it with credit cards--with one major, and absurd, difference. If you find your life ruined by a $100,000 credit card-supported gambling excursion to Vegas, you can declare bankruptcy, pick up the pieces, and move on. If you find your life ruined by $100,000 in private student loans that you took out to provide a better life for you and your family, you're out of luck.

Dischargeable private student loan debt could also save students from predatory lenders. Since borrowers are currently on the hook for a lifetime, lenders have little incentive to consider whether borrowers can comfortably pay them back. If borrowers could declare bankruptcy, like they can with credit cards, lenders might reconsider giving loans to those who can't afford to pay them back.

[Read Women May Have Tougher Time Paying Student Loan Debt Due to Gender Pay Gap.]

If student debt is such a problem that both the president and Congress are willing to agree to spend $6 billion to keep the federal subsidized Stafford loan interest rate at 3.4 percent for one additional year, they should also be willing to change the bankruptcy laws. Allowing private student loans to be discharged in bankruptcy could help the most desperate of borrowers. It wouldn't be a fast, easy, or painless way out. But it would be a way out—something today's borrowers just don't have. It will cost the federal government nothing. And it could make a huge difference to those who need help the most.

Amy Laitinen

About Amy Laitinen Senior Policy Analyst at Education Sector

Tags
economy
Obama administration
Republican Party
student loans

Other Arguments

#1
42 Pts
We Must Protect Families from Exorbitant Loan Rates

Yes – We Must Protect Families from Exorbitant Loan Rates

Gary Peters Member of the U.S. House of Representatives

#3
-17 Pts
Stafford Interest Rate Cut Does Not Help Right Away

No – Stafford Interest Rate Cut Does Not Help Right Away

Matthew M. Chingos Fellow at the Brown Center on Education Policy at the Brookings Institution

#4
-19 Pts
Taxpayers on the Hook as Interest Rate Cut Drives Tuition Up

No – Taxpayers on the Hook as Interest Rate Cut Drives Tuition Up

Brian Darling Senior Fellow for Government Studies at the Heritage Foundation

#5
-22 Pts
Let Student Loan Interest Rates Rise

No – Let Student Loan Interest Rates Rise

Neal McCluskey Associate Director of the Cato Institute's Center for Educational Freedom

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