THE ISSUE: The Student Borrowers Bill of Rights Act of 2013 was recently introduced to the U.S. House of Representatives. One of the most noteworthy stipulations in this bill is the allowance for student loans to be forgiven once a person declares bankruptcy.
Although the Student Loan Borrowers’ Bill of Rights Act has great intentions, one of the bill’s main provisions needs to be restructured before it is ready to be voted into law or even deliberated.
With debt being a looming burden for many college students, parts of this bill including reasonable repayment options and access to earned credentials are logical steps towards a more practical means of college financing. However, a third protection — dischargeability of student loans in bankruptcy cases — is a dangerously shortsighted solution that should not be included in this proposed legislation.
This provision essentially means that students can declare bankruptcy when they simply cannot pay back the loan. This gives lenders a chance to be repaid some measure of the debt, rather than losing all their money. In typical cases of private debt, this repayment involves the liquidation of available assets. However in the case of student debt, recent graduates cannot liquidate their education if they default on their loans.
As a result, lenders will have to increase interest rates to account for the risk that arises from students having the opportunity to declare bankruptcy. Furthermore, this rise in interest rates may increase the total amount of student debt beyond the current $1.2 trillion.
Another way lenders could deal with this added risk of default is by being more wary when issuing student loans. This could cause a significant portion of the population — especially those who have not been able to establish good credit history — to not qualify for student loans and be barred from attending college.
The current state of student debt needs urgent reform, but allowing for bankruptcy is not the solution.
