Center for American Progress

RELEASE: CAP Proposes Reforming Bankruptcy Laws to Include Student Debt
Press Release

RELEASE: CAP Proposes Reforming Bankruptcy Laws to Include Student Debt

Qualified Student Loans could assist troubled borrowers, foster better student loans and stronger academic programs

Read the report.

Washington, D.C. — With student-loan debt skyrocketing and youth unemployment continuing to struggle in the wake of the Great Recession, a new report released today by the Center for American Progress puts forth a proposal for reforming the nation’s bankruptcy laws to not only help troubled borrowers but also to foster better student loans and stronger academic programs.

“We need to reform the nearly four-decades-old policy of blocking borrowers from discharging student loans in bankruptcy, a policy that only makes sense for good loans for good programs,” said David A. Bergeron, co-author of the report and Vice President for Postsecondary Education at CAP. “Today’s student-debt levels were unheard of when Congress last took up this issue, and our nation’s bankruptcy laws should reflect that change.”

Over the past few decades, student-loan debt has grown dramatically and now exceeds $1 trillion, including more than $150 billion in private student loans. But because the discharge of student-loan debt through a bankruptcy proceeding is an extremely rare and inconsistent option, unlike most other debts such as credit card debt, student loans may follow borrowers to the grave. Students and families are saddled with unaffordable debt, and those that fail to make student-loan payments see their wages garnished, their tax refunds taken, and their Social Security checks seized.

With 45 percent of American families burdened by student-loan debt, some members of Congress have proposed allowing private student loans to be discharged more readily in bankruptcy, effectively making student loans equal to credit card debt. With the private loan market in some cases charging interest rates as high as 19 percent, this measure would be an important step in the right direction. The proposal ignores, however, the reality that not all private loans are bad and not all federal loans are ultimately good for borrowers. Federal loans, for example, are available for programs that have very poor employment outcomes.

In the report released today, the Center for American Progress calls on Congress to establish clear and public standards for loans that cannot be easily discharged in bankruptcy, referred to in the report as Qualified Student Loans. Including both federal and private loans, Qualified Student Loans are those that have reasonable repayment conditions such as low interest rates and access to favorable forbearance, deferment, and income-based repayment options. These loans would be qualified based on the successful track record of the institutions and programs receiving the proceeds as a way to ensure that these are programs that—by virtue of their graduate employment rates—give borrowers a reasonable chance to repay. Loans not meeting both standards—borrower-friendly terms and some evidence that graduates are likely going to be able to repay these loans—would be eligible for discharge in bankruptcy just as credit cards are.

The report’s authors, Bergeron and Joe Valenti, CAP’s Director of Asset Building, argue that switching to a system of Qualified Student Loans would provide new transparency in higher education, demonstrating to students and families whether loans are reasonable. Furthermore, the Qualified Student Loan system encourages more prudent student lending. In addition to detailing the current state of student loans and the history of bankruptcy protection for student loans, the report also lays out a detailed plan for how Qualified Student Loans would work.

Read the report: How Qualified Student Loans Could Protect Borrowers and Taxpayers, by Joe Valenti and David A. Bergeron

To speak with an expert on this topic, contact Katie Peters at 202.741.6285 or [email protected].