Tuesday, May 25, 2010

Who Should Pay for Student Loans Gone Sour?

by Daniel L. Bennett

I discuss a recent proposal to make private student loans dischargeable in bankruptcy in this article for Forbes. In the article, I identify several troubling aspects of the proposal and offer a few alternatives, including one that would share some of the burden of bad debts with the colleges whose students default or file bankruptcy.


Anonymous said...

In the past there was an attempt to make states and postsec institutions share accountability for student loan defaults: SPRE, which was enacted as part of the Higher Education Amendments of 1992. It was so unpopular with college officials and state officials that the regulatory meetings with federal officials became quite raucous. Congress lost its nerve and ended the SPRE program before it was ever implemented.

It might be time to try again after nearly two decades . . .

Vince Emmer said...

Provocative piece.

I'll take the position that student loans should be dischargeable in bankruptcy. Further, taxpayers should not be lenders here. And finally, lenders should take the losses of bankruptcy, not taxpayers.

It'll remind lenders to be more careful in making loans. Music majors may face a more limited supply of loans than computer science majors as the latter are more likely to generate earnings to repay the loans than the former.

Students would be steered toward more socially productive fields.

The typical US family already faces $1,000,000 of unfunded public obligations. See https://www.mygovspending.com/beginners/new for an interesting look at your family's share.

It is becoming increasingly apparent that services like public education will face pressure to become far more productive.

In tomorrow's cash strapped world, marginally marketable skills will be even less valuable than they are today.

Lending policies that reflect repayment risk will help enormously.