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Question: Is it time to make (some) student loans dischargeable in bankruptcy?

The latest news out of the Department of Education is that student-loan default rates have risen 25% over previous figures, and the increase is especially pronounced among for-profit colleges. This should come as no surprise in a dismal economy, but the economy is doing quite well.

Although for-profit colleges, which typically serve low-income students, enroll only about 10% of the nation’s undergraduates, they are responsible for nearly half of all defaults. Sound familiar? Think subprime lending housing crisis. These businesses get 80% of their revenue from student loans and have dropout rates nearly as high.

Currently, student loans are a rare exception to the bankruptcy discharge, meaning that only in extreme circumstances will a debtor be able to escape that financial obligation.

While it might seem fair to make student loans “bankruptcy-proof,” the result of this exception has been an erosion of our stature in the educated world. According to The National Center for Public Policy and Higher Education in its “Measuring Up” Report, the cost of obtaining a college degree historically grows at a pace four times faster than the rate of inflation. By comparison, medical costs, which are routinely described as “soaring,” grow half as fast as education costs. At the same time, the U.S. inexplicably ranks a dismal 15th in the percentage of population with a higher-education degree.

There has been a flood of investment dollars into the student-loan industry over the last two decades as a direct result of excepting student loans from discharge. The investor’s capital is more secure, as there is a greater probability of eventual repayment. Remember, always try to invest in a government-guaranteed business.

And now, with the news about astronomically high default rates in the “for-profit college” market, coupled with their sky-high tuition costs, alarming drop-out rates, poor job-placement services and the many other bad practices, the time has come to discourage funding these enterprises by removing the bankruptcy discharge exception for these types of student loans.

If student loans used to fund for-profit colleges become dischargeable, the money investors put into that industry would dry up, which would be a good thing.

Next Week’s Question: Is bankruptcy about tough decisions?

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