Thursday, August 22, 2013

Ignoring the Elephant in the Room: The Center for American Progress Proposal for Easing Bankruptcy Restrictions for Some Student Loan Debtors Does Not Go Far Enough

A lot of fair-minded people have made proposals to reform the federal student loan program.  Unfortunately, most of these proposals don't go far enough.  Specifically, they don't acknowledge the elephant in the room--the fact that for-profit colleges have extraordinarily high default rates and are not being effectively regulated.

Student loan default rates at for-profit colleges is the elephant in the room.

A few days ago, the Center for American Progress (CAP) issued a report that recommends the creation of a so-called "Qualified Student Loan"  product.  Essentially, a Qualified Student Loan would be a loan that meets specified quality standards--reasonable interest rates, provisions permitting loan deferments for qualified borrowers, and certain other features. To be eligible for a Qualified Student Loan, a student would be required to attend a higher education institution that has a relatively low student-loan default rate.

Under the CAP proposal, students who obtained Qualified Student Loans would be subject to the current restrictions on discharging their student loans in bankruptcy.  In other words, it would be virtually impossible for students who obtain high quality loans to discharge them in a bankruptcy court. 

But for students who obtain lower-quality student loans, CAP proposes easier access to bankruptcy.  People who obtained low-quality loans would be eligible to discharge their student-loan debt in a Chapter 7 bankruptcy proceeding after some reasonable waiting period.

Frankly, I don't get it. I appreciate any proposal to ease bankruptcy restrictions for overburdened student-loan debtors, but why offer better bankruptcy options to people who obtained low-quality loans than to people who obtained higher quality loans?   An overburdened student-loan debtor is suffering without regard to the quality of the loan that was taken out. Am I missing something?

Let's face it--the student-loan program is out of control.  As the authors of the CAP report pointed out, there is more than a trillion dollars in outstanding student-loan indebtedness and 45 percent of all American households owe on at least one student loan.

But the student-loan debtors who are suffering the most are the people who borrowed money to attend for-profit colleges.  Ninety-six percent of people who enroll in for-profit colleges take out student loans, and  the Department of Education estimates that 46 percent of these people will ultimately default.

Frankly, it is crazy for the federal government to allow the federal student-loan program to prop up the for-profit colleges and trade schools, which has such a dismal loan default rate. And for CAP to propose reforms in the student-loan program without endorsing tougher regulation of the for-profit college industry shows that it either doesn't understand the nature of the student-loan crisis or is too timid to propose meaningful reforms.


Joe Valenti and David Bergeron. How Qualified Student Loans could Protect Borrowers and Taxpayers. August 20, 2013. Center for American Progress.  Accessible at:

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