The Unintended Consequence of Allowing Student Loan Bankruptcies

An article by Josh Mitchell in the weekend Wall Street Journal raises the specter that Congress may reverse itself and allow privately financed student loans to be discharged in bankruptcy. Debt discharge is a common bankruptcy exit strategy for companies in which they write off their existing loans and either extend equity in the new post-bankruptcy enterprise to the former creditor or in the case of junior creditors they sometimes are given nothing. When Congress changed the Bankruptcy Code in 2005 to make student loans non dischargeable it had the effect of guaranteeing to lenders that their student loans would be repaid. What this did was to attract lenders to the student loan market since loans made there would be safe. Low interest rates offered to students reflected the safety of this loan category.It's not often that the unintended consequences of governmental actions can be predicted before they actually occur. In this case however, Congress's recent discussions of lifting...(Read Full Post)