The Bankruptcy Reform

With much fanfare, President Obama introduced a plan to allow college graduates to reduce some of their loan burdens last month. But student loan policies actually change rather often.

Alex Pareene at Salon takes a look at some potential plans to reduce American debt (both in terms of student loans and housing). More reforms would probably help a great deal. As he points out:

Every single law Congress has passed regarding student loans since the federal program was introduced in 1965 has benefited lenders and made repayment or bankruptcy harder for borrowers. In addition to being unfair, this seems perhaps like bad policy, unless we really think it’s best for college graduates to spend their first decade (or decades) in the workforce sending substantial portions of their income to private lenders.

That’s a good point. Mike Konczal wrote about student loan debt recently and he’s got a few solutions to the student loan problem. The most comprehensive resolution he provides is simply “unapologetically embracing the promise of a ‘public option’ – free public universities that are capable of constraining cost inflation.” That’s probably not terribly likely at this point.

A shorter-term solution, however, is fairly simple: “Party Like It’s 1989,” Konczal writes. Roll back bankruptcy laws to what they were in 1990. Back then debtors could discharge student loans in bankruptcy after five years. Now as a result of student loan reforms pushed by the banks, former students can never get rid of them.

“There is,” Konczal explains, “little evidence these reforms increased access for anyone and functioned more as an easily captured subsidy.”

Furthermore, no one could accuse policymakers who wish to return the original bankruptcy rule to students and lenders of some sort of socialist giveaway. Lending money out to people and facing the risk they won’t all pay it back is a fairly normative part of capitalism. That’s part of the reason banks charge interest, to cover the cost of people who don’t pay back loans in full.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer