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Time to Restore Fairness to Student Loan Borrowers

It’s widely recognized that one of the most reliable means of attaining financial security is through education, including post-secondary education. But we also know that post-secondary education rarely comes cheap. And, in some cases, an educational opportunity that a student is led to believe will put him or her on the track to a better financial future is primarily a way to transfer money from the student or their parents (since they frequently co-sign) to the pockets of the educational institution or private lender – leaving the student with a load of debt, but without the financial security they were seeking.

In most cases, our society encourages individuals to take risks that they believe will improve their financial prospects. That’s a key rationale for offering bankruptcy protections when things do not turn out as the individual had hoped. For instance, it’s good for us as a society when people are able to borrow money to work on inventions, to start new businesses, to invest in their own home, to go to college, or even to buy the right clothes for the job. But despite our best efforts, sometimes our inventions will not be profitable, our business will fail, our house will lose its value, we won’t be able to finish college or get a good paying job even with our degrees, or we’ll get laid off even though we dress and act professionally at work every day.

Because these outcomes are, at least to some extent, inevitable, it is important to provide those who want to take the risks with some degree of safety if the worst happens. Sure, we could just say “if you want to get the rewards, you have to accept the full weight of the negative consequences too.” But that wouldn’t be good for society as a whole or the individual because it would seriously discourage the risk-taking that is necessary for improvement and growth.

On the other hand, we don’t want to say, take whatever risks you want to and don’t worry about the consequences. Establishing that line is where bankruptcy law (among other things) comes in. Bankruptcy, as most people understand, is not an easy, no consequence, “get out of debt free” card. Most people who consider filing bankruptcy actually take too long weighing the costs and benefits and cause themselves some harm by waiting until later than they should have to file. (For example, they often wait until after they have spent everything in their IRA account, which they could have preserved for retirement in a bankruptcy case.)

So how does that fit in with student loans & bankruptcy? In our society, an education is so crucial to success that almost anyone will be willing to borrow whatever it takes to get a post-secondary education. On the whole, not getting a post-secondary education, unless one has some very special skill or apprenticeship opportunity, poses a more severe risk of financial insecurity than does taking out student loans that one might not be able to repay in the future. However, the undeniable truth is that some students will not be able to repay their student loans – just like some people will not be able to pay the money they borrowed to work on that invention, to buy that home, to start that new business, or to buy that new suit.

However, student loans — even student loans benefiting for-profit private institutions — cannot be discharged in bankruptcy like the debts incurred for all of those other reasons.[fn] Additionally, a person who has substantial student loans is often not even able to repay their student loans through a Chapter 13 bankruptcy repayment plan.

Prior to 2005, the bar on discharging student loans only applied to government loans or private loans funded by non-profit institutions. However, in 2005, that bar was extended to loans made by private lenders and benefiting private, for-profit schools. As the author of an editorial in yesterday’s NY Times (Relief for Student Debtors – noted: ”The country has a compelling interest in making it as difficult as possible for student borrowers to elude payment for federal loans. There was no reason for extending that protection to private lenders of student loans.” While, in either case, the inability to discharge student loans can pose an overwhelming hardship, a reasonable distinction exists where the source of the loans was public funds.

Fairness dictates that we put private student loan lenders in the same position as other private lenders – and private student loan borrowers in the same position as other individuals who take out loans from private institutions. To this end, Senator Dick Durbin, Democrat of Illinois, and Representative Steve Cohen, Democrat of Tennessee, and others have introduced legislation to restore fairness in student lending. You can read more about the proposed legislation here.

fn. There are very rare cases in which courts have permitted discharge of student loans, such as when the debtor is completely disabled and has no prospect of working in the future.

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