Private Loans Without Bankruptcy Option Are the Real Problem
Lawmakers should make it possible for overwhelmed student borrowers to discharge private loans
April 27, 2012
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.
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.
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.