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Student Loan Scandal Fallout

posted by Elizabeth Warren

Among the many wonders of the 2005 bankruptcy amendments is the provision that for-profit student loan agencies would get the same protection of non-dischargeability as government lenders.  No one seems to know where the amendment came from and no one seems to recall any evidence of abuse that would cause these for-profit lenders to get treatment usually reserved for domestic support recipients and the taxing authorities. 

In the wake of the scandals over loan company payoffs to college officials, higher education experts are taking a closer look at BACPA.  In a document that was leaked last week, the lobbying strategy of for-profit lender Sallie Mae was exposed.  Educational policy expert Bob Shireman has started asking questions about those strategies, particularly as they relate to bankruptcy. 

Ultimately the nondischargeability decisions boils down to two simple policy questions:  Why should students who are trying to finance an education be treated more harshly than someone who negligently ran over a child or someone who racked up tens of thousands of dollars gambling? And why should a for-profit lender should receive the kind of extraordinary protection that is usually reserved for domestic support recipients or the government?

Politicians are scrambling to distance themselves from student loan companies, so it is no surprise that no one wants to claim credit for insert the nice bonus for for-profit student lenders into the bankruptcy bill.  But if Congress is serious about investigating student lenders, perhaps the first legislative challenge to BACPA could be in section 523.   

Comments

Student debts are the most popular, no doubt. Students get money at the bank, spend them and are not able to repay. The only advice is not to take more than you are able to repay and do not overspend.

Dear Credit Guide: It seems difficult to gainsay the admonition not to overspend. Are you suggesting, however, that students are more likely than other borrowers to overspend? If so, I'd be interested to know whether this intuition is based on data or on anecdote. Regards.

Dear Elizabeth: Well, of course, the best scholarly treatment of this important issue can be found here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=967379

Can you gimme some actual names of such loan agencies, especially of the national value? I have some student-friends who are interested...

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