Student Loan Relief Should Come in Bankruptcy Court

The Biden administration is said to be considering expanding its targeted student debt relief effort to a broader policy that says “at least” $10,000 (some have donated up to $50,000). for each borrower, possibly under an annual income limit, would be eligible for cancellation.

There is a rough consensus that the rise in student loan debt is an issue, and debt forgiveness proponents note that the total amount owed has increased by about two-thirds over the past 10 years to a total of about 1.7 trillion dollars. Largely overlooked in the debate are changes made to the U.S. Bankruptcy Code in 2005, which greatly increased the difficulty of student loans in bankruptcy. .

The “excessive hardship” standards that apply to student loan cancellations create a high barrier to accountability, as borrowers must meet various tests passed by the courts . The difficulty of meeting these requirements, along with the costs associated with filing bankruptcy, results in very little student debt being resolved this way.

As a financial professional, I am well aware of the legal regime governing the settlement of unrealizable financial obligations. I believe that to the extent that a borrower and lender cannot reach an agreement acceptable to both parties, such disputes should be heard through the federal bankruptcy courts created for the purpose of there.

Unfortunately, the 2005 changes to the Bankruptcy Code, combined with the 2010 integration of the student loan market, made the issue essentially a commercial one — the repayment of debt obligations. financial services — entirely within the scope of public policy. Originally as a guarantor and now as a lender for student loans, the federal government has direct authority at the table. The majority has banned the settlement of student loans in bankruptcy cases its final decision subject to political limits. On the matter of policy, the president and Congress would do well to take into account a number of considerations:

Consequences of debt forgiveness for current borrowers. Universal debt forgiveness without borrower-specific qualifications would represent a massive wealth shift in an era of record federal deficits and scarce public resources. What is the rationale for a mass release when most of this debt is being paid as required by the contract? Traditionally, when the government has targeted federal resources at individuals, it has been to promote an obligatory policy or create incentives for desired behavior. No one can reliably say that student loan forgiveness encourages financial responsibility or that other normative behaviors, such as mortgage interest deductions, promote home ownership.

Another reason was that the students were encouraged to borrow money under false pretexts. But targeted relief for loans incurred in connection with for-profit “diploma mills” already exists and is largely untenable. In the case of proposed comprehensive student loan forgiveness, who caused the alleged fraud – the federal government, private lenders operating in the federally insured student loan market Former consuls, colleges and universities, some other bad guy or a combination of these? The cost aggregation of the “student loan crisis” shows systematic market or policy failure, not fragmentary cases of individuals not meeting their financial obligations. their main. If this really happens, the public deserves a clear reckoning about it.

Even if you support such a policy and are comfortable making student loan forgiveness a priority over other federal spending, the policy should be applied fairly. What among those who paid back their loans? There is also the prospect of reward failure and moral hazard allowance. Each borrower prioritizes student loan payments over other expenses and trades off other amounts to pursue education and career paths. Forgiveness does not take these decisions into account.

Message for higher education institutions. Colleges and universities have increased their costs to match the abundant federal resources available to students, including student loans. A late 2021 report based on College Board data found that the cost of college has risen about 4.6 times the rate of inflation over the past 50 years.

As state support for higher education has waned, the role of the federal government has increased. Educational institutions have become more dependent on tuition payments from students, and federal aid in the form of grants and loans has boosted student demand, leading to cost inflation significantly. Forgiving loans indiscriminately, by making higher education “free,” exacerbates these factors and removes any incentive for institutions to manage their costs. surname.

Influence students later. Will all future federal assistance come in the form of grants, not loans? Or will there be an expectation that the new loans will be canceled in some “jumpy” year in the future? Ignoring the fiscal and inflationary effects of serial debt forgiveness or the replacement of subsidized loans, any “fair” or generationally consistent treatment for prospective students will show that higher education will effectively become free.

The concept of free college for all is not a new concept in progressive circles, and student loan forgiveness is perhaps a step in this direction. But is that what we want to do when the value of a college degree is increasingly questioned?

Comprehensive student loan forgiveness is bad public policy. A legal regime – the federal bankruptcy system – already exists for those who really need to be forgiven, with well-established rules and consequences. Rather than push for another budget-defeating, inflationary policy initiative, the Biden administration would better propose that the student loan provisions of the Bankruptcy Code be revised, and credit reform. student loans to limit the federal government’s overwhelming role in funding higher education.

Mr. Shinder is the founder and managing partner of Theatine Partners, a financial consulting firm.

The Journal Edited Report: It offended the millions of people who paid back their loans. Image: Getty Images for We The 45 million Composite: Mark Kelly

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