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As Congress turns its attention to the problems facing higher education, the Department of Education announced last week that it will seek public comment on possible relief for students with outstanding student loan debt.
One proposed option is discharging student loans in bankruptcy court, as is done with other types of loans when borrowers are unable to pay. Under current law, people who file bankruptcy generally cannot negotiate away their student loans except in very narrow circumstances.
While allowing people to discharge student loan debt through bankruptcy may seem like an attractive option, student loans are fundamentally different than other types of loans, and policy must reflect the uniqueness of this transaction.
One key difference is that student loans are typically not supported by collateral or any other sort of assets. In any bankruptcy negotiation, therefore, a student lender is in an extremely unfavorable position relative to other types of creditors.
Critically, the federal government is the lender for 90 percent of student loans for college, meaning that taxpayers will lose if student loan debt can be discharged in bankruptcy. Discharging student loans in bankruptcy would also be particularly harmful for the American taxpayers who are financing the federal student loan program.
Read the full article on student loan bankruptcy by Mary Clare Amselem and Norbert J. Michel, Ph.D. at The Heritage Foundation