A Crack in the Student Debt Nondischargeability Wall?

Per a report from the federal Consumer Financial Protection Bureau (read it here), the Obama administration is willing to see some slight expansion of the nearly impenetrable wall barring discharge of student loans in bankruptcy. The report recommends that Congress consider making private (not federal) student loans dischargeable.

While the full report is quite long, one sentence from the Executive Summary stands out: "In 2008, 42% of undergraduates at for-profit colleges took out a private student loan, while only 14% of all undergraduates used a private student loan." That's right, it's the for-profit "educational" institutions that are hard at work duping students into borrowing from private as well as federal sources, neither of which is currently dischargeable in bankruptcy.

Industry opponents immediately attacked the report's suggestion by arguing that it would drive up borrowing costs. That's certainly one possibility. Alternatively, as the report also suggests, lenders concerned about possible bankruptcy of student borrowers might evaluate borrowers prospectively (like lenders for other sorts off loans), consider the prospective borrower's course of study (see my earlier thoughts on "The Market and Student Loans" here), and get more third-party guarantors (i.e., mom and dad).

I expect that nothing will come of the CFPB's recommendations, particularly in the Republican House (captured, even more than the Senate, by financial industry interests). Yet the drumbeat of news about student loans should alert at least my readers of the coming collapse of this market.