What if Student Loan Debt Could Be Subject to Bankruptcy?

[Scott Trench]

Hi folks - I wanted the BP community opinion on an off-topic finance related thought.

It seems to me like a ton of millennials, and more of whatever the next generation is called, are graduating college with massive student loan debt, often disproportionate to the expected income they will generate after they receive their degree. For example, a history major will graduate with six-figures in student loan debt. A veterinarian or a dentist will graduate with debt like that of a Doctor, but with far less income potential.

Has there been any discussion or debate about this as a potential solution:

Going forward, allow student loans to be subject to bankruptcy law. 

The way I understand things, most debts, like a home mortgage, credit card debt, medical debt, etc, are subject to a statute of limitations. After a period of years, usually 7, creditors can no longer sue you to collect debt on outstanding balances. This protection does not apply to student loan debt and a few other types of debt.

Well if it did, and individuals COULD file for bankruptcy on student loans, then creditors would no longer support education which was unlikely to result in the student speedily repaying the debt.

I'm not excusing people for making decisions to take on too much student loan debt, and I'm not suggesting that we forgive all student loan debt, or let those who signed up for it already file for bankruptcy to get out of their obligations. I'm suggesting a change to the law that allows future student loan debt to be subject to bankruptcy protection laws in the same way that medical debt is. Perhaps you could argue for a longer statute of limitations - maybe 10, 12, or 15 years. But having any statute of limitations at all, I believe, would dramatically deflate the education and student loan industries in a necessary way, and steer the country towards more STEM education and the types of degrees that the marketplace demands.

I believe that creditors, in the private marketplace, would then eliminate the opportunity for students to take on crazy amounts of debt for uneconomical career choices. 

Would you lend $100,000 to a 17-year-old college kid studying philosophy if they had the option to declare bankruptcy? No way. The only reason that kid gets a loan right now is that the loan follows him or her for LIFE. 

 Would you lend to that same kid if they were to study Computer Science? Maybe. As long as each installment was contingent on appropriate academic performance and the student taking appropriate steps to increase the likelihood of landing a lucrative job.

Anyways - just spitballing here and hoping for some feedback on this thought. 

[Will Gaston]

@Scott Trench fantastic question.

As someone who owns ~50 student rental units and rents to 140 students, the biggest long term disruptor to my niche seems to be a student loan bubble.

Many of the tenants in my market (via their parents or their student loans) are paying $700/-$1000/month plus utilities for housing. Living in Vegas style apartment complexes with stainless steel everything, rooftop pools, and all of the amenities that you can imagine.

They are then graduating and barely able to afford half of that on their own. And that's if they can afford anything at all. Many of my tenants ask to have their security deposit refund sent to their parents house. Because that's exactly where they are moving back to.

It is the path of least resistance to blame "the system" for the looming student loan debt crisis but a lot of the responsibility needs to be put on the students and/or their parents. You don't have to go to a private liberal arts college that costs 65k year to get a good education. You just don't. Especially if you can't afford it.

So, to answer your question, I don't think that bankruptcy should be an option. Especially telling a 17 year old that.

I agree that the cost is way out of control, but there are plenty of students out there who work in college and come out with low or no debt.