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Student Debt and Bankruptcy


The idea behind bankruptcy laws is that both debtor and creditor benefit. The debtor can get on with life, mostly or entirely free of debt. The creditor can face the reality that what is owed will not be fully paid, and so also can move on.

The greatest personal debt problem for Americans today is the $1 trillion-plus owed for education. It halts careers and even the forming of new families. Money that might pay for children instead goes to student loan debt that can rise well above $100,000.

Part of the problem is that college costs too much. As we have noted, university systems employ more administrators than professors, a misapplication of resources supplied by higher tuition, meaning higher debt for many students.

Another big component of the debt problem is that Congress in 2005 made it nearly impossible for Americans to discharge college debt through bankruptcy, as they can in most cases with personal loans, credit card, automobile, business or other debt.


Dick Durbin, D-Ill., is advancing a proposal that would let students more easily declare bankruptcy over education loans from private banks. However, according to the Wall Street Journal, "[t]he bill would not apply to federal education loans, which comprise more than 80 percent of the roughly $1 trillion in outstanding student debt in the U.S."

We believe Sen. Durbin's idea is a step in the right direction. But all student debt — including to the federal government — should be treated like credit card and other debt.

Moreover, in addition to reducing college administrative overhead to reduce tuition, what's needed is faster economic growth to give recent college graduates decent jobs so they can pay off their debts more quickly. The recent tax increases from the "fiscal cliff" likely made matters worse.

But at least Congress is starting to realize that students and graduates overburdened with debt need help.




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