Its Time to Shed Some Light on the Student Loan “Bailout”

Michael Lux Blog, News, Student Loans 0 Comments

The level of anger coming out of columnists and commentators about a student loan “bailout” continuous to grow.

One columnist recently argued that “When someone has agreed to the terms of a transaction they later regret, we do them, and society, a disservice by offering a trillion-dollar mulligan.”

Setting aside his condescension that helping people burdened with student loans is somehow a disservice to them, he seems to have no real grasp on the issue.

This problem isn’t isolated to one columnist either.  It seems that whenever there is a discussion of restoring bankruptcy protections to student loans, it is always called a bailout.  Next comes the argument about how the borrowers have a contract and they should be held to it starts.  The mob mentality seems to be that if you wrote your name on the dotted line, you should pay the bill… no exceptions.

A Valid Point of View… but not the point

The idea that someone should be permanently bound to their contractual obligations is a valid one.  There are certainly issues with it, but nonetheless a reasonably sane individual could subscribe to this position.  However, it runs completely inconsistent with the rules that govern consumers today.

If you run up 30k in credit card debt and cannot pay it back, bankruptcy offers a fresh start.  If you purchase a home and owe more than what it is worth, bankruptcy can help you get out from under the mortgage.  Student debt is a special exception to the normal rules of bankruptcy.

Two Paths

Suppose you have to 18 year old recent high school graduates.  One pursues a college education, the other starts a business.  Both spend 50k pursuing their dreams.  Unfortunately for both, things don’t work out.  The degree leads to no better employment and the business goes under.

Here in the US, we encourage higher education and cherish the small business owner.  Both endeavors are critical to our economic growth.  Yet we treat the decisions of these two 18 year olds completely different.  The business owner can declare bankruptcy and move on to the next opportunity.  As for the student?  There is no bankruptcy, and there is no fresh start.

The Bottom Line

Why do we treat student loans differently than mortgages, auto loans, credit card debt, and business costs?

Restoring bankruptcy protections to student debt is far from a student loan bailout.  It simply creates a path to a fresh start.  Anyone who has ever declared bankruptcy knows it is no picnic.  Rather, it is an act of last resort.

Borrowers calling for bankruptcy protection in student loans are not looking for a bailout… they just want a flicker of light at the end of the tunnel.