Student Debt Relief

Provide Bankruptcy Relief to Student Debtors

Eliminate section 538(a)(8) of the U.S. bankruptcy code, placing student debt on equal footing with other debt and allowing it to be discharged in bankruptcy.

Policymakers committed to championing “college-for-all” have given student debt an unhealthily “sacred” status. Because they believed a college education was the key to prosperity, they provided open-ended subsidies for students through loans that the market would never offer. At the same time, overconfident in a college education’s value, policymakers prohibited discharging student loans in bankruptcy. This has led directly to the student debt crisis. Students borrow enormous amounts of money to invest in education that often offers little or no return, leaving them saddled with unmanageable debt when things don’t work out; colleges collect ever-increasing tuition without caring if the debt can be repaid; and policymakers resort to costly and inequitable loan cancellation in an effort to provide relief. Forgiving student debt holds no one accountable for these failures, and in fact encourages more of the same. The bankruptcy system, already tailored to helping debtors in need of relief, is a much better option.

The United States should allow the discharge of student debt in bankruptcy, currently obstructed by section 538(a)(8) of the U.S. bankruptcy code. The American bankruptcy process works well, giving indebted individuals a fresh start when they need it, while imposing substantial costs to ensure that those who can afford to repay their debts usually do so. Combined with sensible reform to force colleges and universities to bear the burden when their students default, bankruptcy offers relief where it is needed and creates incentives for all involved that will strengthen the higher education system.