Should People With Student Loan Debt Be Allowed To Declare Bankruptcy?

By Phillip Molnar
The San Diego Union-Tribune

WWR Article Summary (tl;dr) Should student debt be treated like other debt, allowing individuals to file for bankruptcy? Well, it depends on who you ask, economists have a mixed response to the question.

The San Diego Union-Tribune

Question: Do you think Congress should make it easier for those with student loan debt to declare bankruptcy?

Phil Blair, Manpower

NO: Students need to take their education debts as seriously as any other debt. But we do need to make sure that student debt can be refinanced at very competitive rates and terms, just like all other debt that Americans take on.

Kelly Cunningham, San Diego Institute for Economic Research

YES: Although allowing student loan holders to declare bankruptcy will cause lenders to be much more restrictive in extending loans. Ease of issuing loans combined with rising college tuition led to student debt exploding over the past decade. Student loan servicers operating outside normal financial oversight often extended loans to candidates with extremely high chances of defaulting and no real commitment to higher education – much like subprime mortgages issued to nearly anybody during the mortgage crisis.

David Ely, San Diego State University

YES: Unlike other forms of debt, student debt is typically not dischargeable through bankruptcy. Thus, individuals can struggle for years trying to pay off student loans. Unable to repair their credit rating, spending is constrained and borrowing for a major purchase such as a home is unlikely. The economy would be healthier if these individuals were able to emerge from bankruptcy with the burden of student debt lifted and then able to rebuild their lives.

Gina Champion-Cain, American National Investments

NO: Those seeking advanced education should be precisely the population able to make a loan risk calculation not a group destined for bankruptcy. Government’s debt relief role should be limited to accrediting institutions that provide viable, valued educations. Restricting student loan access to predatory for-profit schools would preempt the source of greatest concern and protect the most vulnerable students. Education must become more accessible and less loan dependent or we’ll all suffer economically.

Alan Gin, University of San Diego

YES: There is no reason to treat student debt differently than other debt. Most students are able to repay their debt. For those that can’t, bankruptcy should be an option. As an aside, many of the students who get into trouble are those who have been lured to attend private, for-profit colleges, which encourage students to borrow but sometimes leave them with dubious job prospects. There should be greater regulation of that, but it looks like the current administration is going in the opposite direction.

James Hamilton, UC San Diego

YES: Student debt should be governed by the same bankruptcy laws that apply to people who get into problems with other debt they can’t repay. Some students made mistakes taking on loan burdens they really can’t handle, and taxpayers made a mistake in letting this program get so big. But at this point it’s time to admit those mistakes, reform the student loan program, and let everybody move forward.

Gary London, London Group of Realty Advisors

YES: If alumni cannot actually pay off a loan isn’t that an indicator that their education failed? The ability to default is ultimately a wake-up call to the education system to deliver, or they won’t get paid back for the increasingly steep cost of propping up an educational system in need of radical reform and transformation. Colleges can’t just charge too much, defer loans and absolutely expect to be paid back with interest. Everyone has to earn their return.

Norm Miller, University of San Diego

NO: Bankruptcy is used too frequently in the U.S., allowing too much risk taking. We should make it harder to use bankruptcy for any kind of debt, mortgages included, with the exception of unpredictable medical debt. Students should consider job prospects based on the skills they might gain in school prior to taking on loans, but many don’t and 20 percent of all student debt is in default. Forgiving that will send the wrong message about debt and responsibility.

Jamie Moraga, IntelliSolutions

YES: Student debt should be treated like other debt. Debt is debt. This also means that interest on that debt would need to be handled as the market dictates for loan collateral, loan qualifications, and loan interest rates. Fed Chairman Powell recently said that growing student loan debt has the potential to hold back overall economic growth and can have long term negative impacts for individuals, including poor credit ratings. Allowing borrowers to discharge this debt is a much better solution than the government (i.e. taxpayers) having to pay defaults on the loans.

Austin Neudecker, Rev

YES: Currently, student debt is treated as a toxic liability and is protected against bankruptcy while still at predatory rates (double car and mortgage loans!). Should our society value purchasing cars (a depreciating asset) above educating its citizens (increasing wages/taxes & competitiveness)? These rates make higher education untenable for many prospective students. Rather than eliminate the bankruptcy exemption, I would prefer student loans at significantly lower rates (especially if they cannot be discharged).

Bob Rauch, R.A. Rauch & Associates

NO: Most student loan debt outstanding is comprised of federal student loans, hence, any cancellation of federal student loan debt via bankruptcy would be at the federal government’s (and taxpayer) expense. There are income-driven repayment plans available and federal student loans can be forgiven in 20-25 years. Further flexibility in dealing with these loans sends the wrong message to students as part of the learning process is to be responsible financially.

Lynn Reaser, Point Loma Nazarene University

NO: Student loans continue to weigh on many households, but allowing bankruptcy could trigger the wrong set of incentives. College-bound students could assume even larger amounts of debt with the knowledge that such debt could be relatively easy to discharge later. This could prevent individuals from carefully assessing the value of different institutions, evaluating the potential of different careers, and finishing college in four years. The addition to the nation’s debt could also be significant.

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