As President Obama reminded us yet again in a speech from the White House today, time is quickly running out for Congress to extend the current 3.4 percent interest rates for subsidized Stafford loans. Without action (cue scary music or slow-jam here), interest rates will double to 6.8 percent on July 1st. Members on both sides have lined up to support an extension, and are now fighting over to how to pay for this one-year fix. But this one-year “fix” does nothing to help address the real problems—the skyrocketing costs of college and students drowning in debt.
We’re not likely to see any long-term solutions to rein in college costs in an election year. But as the interest rate debate demonstrates, there is the political will to respond to constituent anxiety about student debt and the specter of a lifetime of indentured servitude. Rather than focus on an expensive, one-year solution that will only affect a small portion of new loans and borrowers, why not do something that could help the most distressed borrowers now? Congress should allow private student loan debt to be treated like it used to be—like most other consumer loans and dischargeable in bankruptcy.
Part of the problem is semantic – “student loans” lump fundamentally different things together. While federal student loans offer borrowers protections and a variety of repayment options, private student loans are no better than credit cards; in fact, they’re worse. Thanks to lobbying efforts of the student loan industry leading up to the 2005 Bankruptcy Reform Act, private student loan debt is treated more harshly than most other private debt. Gambling trips to Vegas? Dischargeable. Out of control spending at the mall? Dischargeable. A private-student-loan-financed college education that didn’t live up to its promise of a better future? Not dischargeable. (But consider this: Paid your tuition and fees with your credit card? Dischargeable.)
Some might be concerned that dischargeable private student loans will make private lenders more cautious to lend to students, thereby limiting access. But given that the majority of private loan borrowers do not max out their more consumer-friendly federal loans, these concerns are probably unwarranted. Limited private lending should also result in students taking better advantage of federal loans before turning to risky private loans. This would be helpful to all student borrowers, not just the small number who might see bankruptcy as the only way out.
To be clear, bankruptcy is not an easy decision or an easy way out—it is a last resort. But this last resort is currently unavailable to borrowers with private student loans. If corporations that lay off workers and renege on pension promises are allowed to declare bankruptcy, why shouldn’t borrowers who invested in their education but are failing to make ends meet? If the President and Congress really want to respond to the needs of students sinking in debt, they’d stop fooling around with one-year gimmicks and change the bankruptcy code for these high-cost, risky loans.