A Bad Idea for Student Loans

Glenn Reynolds has a remarkably bad idea for dealing with student loans:

Student loans, if they are to continue, should be made dischargeable in bankruptcy after five years — but with the school that received the money on the hook for all or part of the unpaid balance. Up until now, the loan guarantees have meant that colleges, like the writers of subprime mortgages a few years ago, got their money up front, with any problems in payment falling on someone else. Make defaults expensive to colleges, and they’ll become much more careful about how much they lend and what kinds of programs they offer.

No, colleges won’t be more careful about how much they lend. They’ll become much more careful about who they admit. Financial discrimination in admissions is already openly practiced by all but a few elite private colleges. Put colleges on the hook for student loans, and suddenly you’ll find a massive effort to recruit the richest students whose parents can pay tuition or bail them out from bankruptcy.

And if Reynolds was right about colleges changing their programs, that would be even worse: colleges might abandon important fields that pay too little while pushing purely vocational majors that have little educational value.

But Reynolds is right about one thing: it’s disturbing that student loans are immune from bankruptcy proceedings. It’s wrong for the government to use its power to declare that it is the only creditor who cannot suffer harm in a bankruptcy hearing.

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