Making Student Loans Dischargeable in Bankruptcy Could Be a Free-Market Idea

News stories abound with examples of graduates who have borrowed colossal amounts of money and who have little potential of paying it back, at least in the short- and medium-term. These students are shackled to this debt. It's true that these graduates chose to borrow this money, but it is also true that the federal government has chosen to give protections to lending companies for a certain kind of loan. It is not clear whether these special protections for certain lenders are in the best interests of the nation and its citizens, nor is it clear why the loans taken on by some of America's youngest should be the hardest to discharge.

Here's a riddle that many Americans are familiar with: how are a house mortgage, credit card debt, and a car loan different from student loans? For the latter, the federal government has gone the extra mile to protect lenders by making them non-dischargeable in bankruptcy. This means that student loans, unlike almost every other kind of loan available, cannot be escaped through bankruptcy. With student loan debt approaching nearly $1 trillion nationally, a growing portion of Americans are facing a growing burden of inescapable indebtedness. This burden of debt is especially borne by the young, the group which has perhaps been hit the hardest by the economic slowdown.

It wasn't always this way. According to the non-partisan Congressional Research Service, until 1976, all student loans could be discharged in bankruptcy. Up until 1998, student loans could be discharged after a waiting period (of initially five and later seven years after repayment was scheduled to begin). In 1998, Congress made federal student loans nondischargeable in bankruptcy, and, in 2005, it similarly extended nodischargeability to private student loans. (Extreme hardship can still result in the discharge of some student loans, but this condition is rather difficult to establish.) Since 2000, student loan debt has exploded, and private student loans have grown at an accelerated rate. Somehow, people still went to college and were able to get loans prior to 2005. Clearly, certain lenders found it in their own interest to provide loans even when there was a chance of bankruptcy.

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