Is it time to make (some) student loans dischargeable in bankruptcy?

The latest news out of the Department of Education is that student loan default rates have risen 25% over previous figures, and the increase is especially pronounced among for-profit colleges.  This should come as no surprise in dismal economy, but the economy is a copout to the real problem behind these student loan defaults.

Although for-profit colleges, which typically serve low-income students, enroll only about 10 percent of the nation's undergraduates, they are responsible for nearly half of all defaults.  Sound familiar?  Think subprime lending housing crisis.

There is a proven formula in this country of profiteering at the expense of the poor, and these for-profit colleges are no exception.  These businesses get 80% of their revenue from student loans and have dropout rates nearly as high.  Senator Tom Harkin (D-IA), Chairman of the Senate Health Education Labor and Pensions Committee, recently stated:

For any student, loan default is a heartbreaking situation with long term consequences. . .  Today's data should give us further concerns about whether some for-profit colleges are doing enough to help their students succeed.  The cohort default rate at for-profit schools rose much faster than at public and nonprofit private colleges in 2009, and for-profit college students are more than twice as likely to default on their loans as public college students, and three times more likely than private nonprofit college students.  Coupled with sky-high tuition costs, alarming drop-out rates, poor job placement services and the many other bad practices that we've uncovered in the HELP Committee's investigation, it is clear that the for-profit education industry needs greater oversight in order to ensure that students and taxpayers are getting a good value for their investment in these schools.

Okay, so they've identified the problem, but what's the solution?  Congressman Hansen Clarke (D-Mich.), has the right idea – make these for-profit college student loans dischargeable in bankruptcy.  Currently, student loans are a rare exception to the bankruptcy discharge, meaning that only in extreme circumstances will a debtor be able to escape that financial obligation.

While it might seem fair to make student loans "bankruptcy-proof," the result of this exception has been an erosion of our stature in the educated world.  The United States is no longer viewed as the pinnacle of higher education.

A couple years ago, I discussed the inverse relationship between the rising cost of education in this country versus the quality of education.  According to The National Center for Public Policy and Higher Education in its 2008 "Measuring Up" Report, the cost of obtaining a college degree historically grows at a pace 4 times faster than the rate of inflation. By comparison, medical costs, which are routinely described as "soaring", grow half as fast as education costs.  At the same time, the U.S. inexplicably ranks a dismal 15th in the percentage of population with a higher education degree.

There has been a flood of investment dollars into the student loan industry over the last two decades as a direct result of excepting student loans from discharge. The investor's capital is more secure, as there is a greater probability of eventual repayment.

The desire to maximize the student loan market has frequently lead to abuse and fraud by lenders and educators.  Remember back in 2007 when Sallie Mae, the nation's largest student loan lender, was fined $2M for creating a student loan scheme involving 19 universities?

And now, with the news about astronomically high default rates in the "for-profit college" market, coupled with their sky-high tuition costs, alarming drop-out rates, poor job placement services and the many other bad practices, the time has come to discourage funding these enterprises by removing the bankruptcy discharge exception for these types of student loans.

If student loans used to fund for-profit colleges become dischargeable, the money investors put into that industry would dry up, which is a good thing.

For more information on these matters, please call our office at 305 548 5020.

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