NCPA - National Center for Policy Analysis

Amass Student Debt and Dump it on Taxpayers?

October 7, 2015

It is common knowledge that students who have amassed large college debt burdens cannot discharge those debts through bankruptcy. That "knowledge," however, is not really the case -- the laws are written to permit discharge of student loan debts in some cases. The federal government is pushing for broader interpretations of those laws, incentivizing students to amass debt and then dump it on taxpayers.

  • Analysis of 35 adversary proceedings in 2012 where the debtor sought discharge of student loans, the debtor won full discharge in 47 percent and received some reduction or more favorably repayment terms in another 33 percent.
  • Many of the successful debtors did not have legal counsel; they represented themselves.
  • The Department of Education recently released a "guidance letter" pertaining to undue hardship discharge cases. The letter tilts the scales more in favor of students who are petitioning for bankruptcy discharge.

Pressure from the Department of Education to relax efforts at making student debtors pay their obligations is consistent with the general approach of the Obama administration. The president's program calculates payments based on earnings and forgives balances after 20 years -- 10 years for those who find jobs in "public service." Those policies will appeal to students, but they encourage them to keep amassing debts in pursuit of costly credentials.

Congress can and should clean up the mess by restoring the bankruptcy code to its pre-1977 terms, removing the distinction between kinds of debt. That would make private lenders far more circumspect about their education loans. Many students might be turned down, but for the good reason that their educational "investment" looks like a bad one.

Congress ought to change federal loan policy to require the schools that have received Title IV loan money bear some responsibility if the student defaults on the payments. Having "skin in the game" would compel universities to evaluate the risk of enrolling any student.

Source: George Leef, "Actually, You Can Discharge Student Debts and the Feds Want to Make It Easier," John William Pope Center, September 30, 2015.

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