In economics we have a term, corner solution. This is an all or nothing concept. With student loans and bankruptcy, the possible corner solutions are forgiving all loans at graduation and never allowing student loans to be discharged in bankruptcy.
The United States has chosen the second corner solution. As best I can tell, there is no way to ever get rid of a student loan, except by paying it or death, regardless of financial and other circumstances. They cannot be discharged in bankruptcy.
Corner solutions are rarely optimal, but the current one is truly terrible. Europe apparently has something like the first corner solution. So did California at one time. The original higher education pact assured Californians a tuition-free degree. This is similar to making a loan and waiving repayment when the student leaves school.
Free is always a bad price. Education is no exception. If something is free, too much will be demanded. Europe is looking for new ways to fund higher education, and California used the deception of calling tuition fees to renege on its commitment.
Free may not be the right price, but current policy is worse. Not allowing student loans to be discharged in bankruptcy under any conditions is simply barbaric, just one step away from debtors prisons.
You want to have the correct incentives for people to pay the loan, but civilized societies long ago recognized the circumstances change, and we are all better off with efficient ways to adapt to those changes. Bankruptcy is such an efficient process. It has worked well for a very long time.
Today, many of our recent graduates are suffering because of student loans cannot be discharged, a result of a changing economy and a deep recession.
Financial troubles are disasters for the individuals and families caught up in them. Marriages are destroyed. Families are destroyed. Lives are destroyed. Some will commit suicide.
We don’t have to make it particularly easy to discharge student loans, but we do have to provide a release. The current recession is forcing many of our young people to start their adult lives under extraordinarily challenging circumstances. Research has shown that the bad economy will limit the income of many for their entire career. Why make it harder by imposing a burden from an unsuccessful past?
We need to give the kids a break.