The Associated Press takes a good look at how a 2005 law traps borrowers in private student loans—upending the whole point of the bankruptcy code.
Back in 2005, President Bush signed the misleadingly named Bankruptcy Abuse Prevention and Consumer Protection Act, a giant giveaway to the banking industry that included a provision making it nearly impossible to discharge private student loans in bankruptcy. The justification was that lenders needed protecting because, as the AP puts it, “a bank can repossess your car but not your brain.”
But that, of course, makes no sense. Using that logic, you shouldn’t be able to discharge credit card debt in bankruptcy. Wouldn’t the banks love that?
As college education has become more and more important to survive, much less thrive, in the economy, we’ve shifted more and more of the costs of education onto 18 and 19 year olds who have no idea how much money they’ll make in ten or twenty years. Now even if your student debt is crushing you, you can’t get out from under it.
My wife and I, for instance, have six figures in student loans, much of them from private loans she got for grad school here at Columbia (the university giveth to the Chittums and it taketh away). We’re able to afford them, but if one of us lost a job for any length of time, our payment would be just about impossible to cover. We’re lucky, and we went into most of that debt with eyes wide open, but there are many, many borrowers out there who aren’t and who didn’t.
This has broader economic implications too. A class with heavy debt loads they can’t discharge when they get into trouble is going to take fewer risks—start fewer businesses, take riskier jobs—the kinds of things that are good for economic growth.
The bankruptcy problem isn’t just with private loans, though their higher interest rates make them individually more troublesome. Federal student loans outnumber (in dollars) private loans nearly six to one, and they can’t be discharged either.
And why is that, exactly? The AP is good to give us an eye-opening little history of student loans and bankruptcy. Until 1976, you could discharge any student loans, including government ones, in bankruptcy. A law passed then made you wait five to seven years. By 1998, President Clinton signed a law making it nearly impossible to discharge them at all.
The tiny benefits for taxpayers mean a lot of hardship for the small minority who get into trouble financially. The AP tells us just how small that group was before the bankruptcy laws started to get stricter:
Before 1976, when student loans were dischargeable in bankruptcy, there’s little evidence borrowers abused the practice. A federal study from that time estimated less than 1 percent of all matured student loans were discharged in bankruptcy.
That data is part of the AP’s nice pushback against industry spin that allowing loan discharges would raise rates and reduce lending, a line it says “swim upstream against a lot of historical data.”
I would have liked a bit more on how the law affected private student lending. Did interest rates go down or did lenders just pad their profits?
But this is a good effort on an important issue.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.