Modifying the Student Loan Bankruptcy Discharge. Or, Dick Durbin and Me

It's a rare occasion that Illinois Senator Dick Durbin and I agree but go here (if you can, it may be behind a paywall) to read about the latest (un)doings in Congress about the nondischargeability of student loans bankruptcy.

The relevant portion of the post on Bloomberg reads,

Durbin, the No. 2 Senate Democrat, told Bloomberg BNA via email Sept. 11 that he was “proud to have reintroduced” legislation — ‘The Fairness for Struggling Students Act,’ (S. 1262)— to restore the Bankruptcy Code's pre-2005 treatment of private student loans and take “an important step toward addressing the student debt crisis in America.”          

The key to my support is the conservative point: "to restore the Bankruptcy Code's pre-2005 treatment of private student loans." Until 2005, only federal student loans could not be discharged in bankruptcy. (The history of how that state of affairs came to be is another story for another time.) (Minor correction: yes, it is possible to get a discharge of student loans in bankruptcy but it's difficult, expensive, and relatively uncommon. Read here and here.)

Just why private lenders to students should get the same treatment as our federal government has never been clear. After, all private student loans are not like taxes, something that must be paid to keep the government running. Prohibiting borrowers from discharging private student loans simply subsidizes private lenders. (Who, come to think of it, may be large campaign donors. But that couldn't explain anything, could it?)

As I explained here, the incremental subsidy that nondischargeability adds for making private student loans has played a part in driving the increasing costs of higher education. And there is no legitimate warrant for lining the pockets of either lenders of college administrators.

So, back to the beginning, or at least back to 2005. Although I give Durbin's proposal a zero chance of success, it illustrates that "what is" has not always been the case and that "what is" may be unwise.