• 12
  • January
    2012

In our previous post, we began looking at a Forbes article which made the case for opening up student loans for discharge in bankruptcy. As we noted, two major objections to doing that are that there would be widespread abuse of the system as well as broad-sweeping contraction of the private student loan market. As the author of the article points out, though, there is very little evidence to support such objection.

Some object to opening up private student loans to discharge because they believe young people do not understand or care about the negative impact of filing for bankruptcy. The other side of the story is that nobody wants to file for bankruptcy. The vast majority of people suffer from the stigma connected to bankruptcy, and would choose other options if given the chance. And there is in fact a federal program for graduates that permits low monthly student loan repayments and debt forgiveness after a number of years in repayment.

In terms of contraction of the private student loan market, the author points out that there would in fact be beneficial consequences to this on several levels, including a shift in the market pricing of higher education and perhaps even a limitation on federal funding of for-profit colleges.

It isn't clear whether any of the present bills proposing discharge of student loans has a strong chance of making it through Congress, but it is clear that there are many people struggling with major debt. That debt includes student loans, medical expenses, and credit cards bills.

One thing that can't be argued is that bankruptcy is never an easy decision to make. Even for those to whom it brings great financial relief, there is the financial rebuilding that must take place afterward. While it is possible to get back on one's feet and have financial freedom, it is a difficult task that requires discipline and patience.

Source: Forbes, "Student Loans and Bankruptcy-The Debate Continues," Peter J Reilly, January 10, 2012.