A Call to Reform Student Debt Laws

The National Association of Consumer Bankruptcy Attorneys has issued a report cautioning that the growing social strain of student loan debt could culminate in a financial crisis akin to the bursting of the mortgage debt bubble. Their primary policy recommendation is to make student debt dischargeable again, a protection removed in stages beginning in 1976 and completed in 2005:

These statutory changes to the bankruptcy discharge for student loans were made despite the lack of any hard evidence that there were abuses of the system. In fact, in 1977, after the original bankruptcy amendments had been adopted but before they went into effect, the House Judiciary Committee issued a report concluding that the nondischargeability provision should be repealed. The Committee found that there was no real problem and that fewer than one percent of all federally insured and guaranteed educational loans were discharged in bankruptcy.

Furthermore, the extension of the preferential treatment for student loans in bankruptcy to private student loans came during the credit industry’s feeding frenzy – the 2005 comprehensive rewrite of the bankruptcy code. Amid the chaos of credit card lenders, car financiers and rent-to-own oufits all advancing their self interests in a long and complex series of amendments, an unidentified lawmaker slipped in a provision making private student loans non-dischargable. There were no hearings or public discussion of such a fundamental change in policy on private student loans during the several years the bankruptcy bill was under discussion. Now, private student lenders, despite their lack of protections afforded by government lenders, enjoy the same protection from default.

Student Debt: The Next Financial Crisis? – Forbes

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