Exacerbating the problem of sky-high student debt levels are federal loan forgiveness policies, such as income-based repayment, that increase the likelihood that students will continue to take on debt for degrees that may or may not pay off in the form of lucrative careers. In today’s Pope Center Clarion Call, George Leef explains how the Education Department may be making things worse. It recently issued a “guidance letter” to loan holders – private firms that manage and collect fees on federal student loans – that could make it easier for people to discharge massive student loan debt if they can prove that such debt has caused “undue hardship.” This development, along with dozens of recent court cases in which individuals have successfully discharged debt, could cause a major uptick in bankruptcy proceedings. The problem with that, however, is that taxpayers, not loan holders, private lenders, or the schools that have received federal loan dollars, will end up paying.
Leef argues that the latest federal rigmarole is not only confusing for those with debt, but creates bad incentives for the student loan industry. He argues that Congress should bring back the pre-1977 bankruptcy code, which did not distinguish student debtors from other debtors. “If someone qualifies for bankruptcy, the reason why shouldn’t matter. That change would make private higher education lenders far more circumspect about their loans. Many students might be turned down, but for the good reason that their educational ‘investment’ looks like a bad one,” writes Leef. As for schools receiving federal loan money, Leef says there should be a “skin in the game” rule that requires them to “bear some responsibility if the student defaults on the payments,” thereby “[compelling] colleges and universities to evaluate the risk of enrolling any student.”