When Loans Aren't Financial Aid

The Chronicle of Higher Education has a good article today about a new Senate bill (S1561) that seeks to make private student loan debt dischargeable in bankruptcy. According to the article, Sallie Mae and other for-profit loan companies have signed off on the legislation—perhaps realizing that this is a battle not worth fighting in light of the string of allegations and fines from NY Attorney General Andrew Cuomo earlier this year. Unfortunately, it looks like the bill might get left on the wayside because those it would benefit—students with financial problems—aren’t the most vocal group on the Hill.

Back in 2005, language added to a bankruptcy reform bill (spurred on by for-profit loan companies) made private education loans as difficult to discharge in bankruptcy as federal education loans. This means that a student can discharge a car loan or credit card debt, but can’t get relief from often large and onerous student loan debt. The argument for preventing borrowers from discharging private education loans was that the money the loan companies would save would allow them to keep loan prices low and lend to more high-risk student borrowers.

Seems reasonable…But is a high-interest private loan that can’t be discharged in bankruptcy really financial aid for a student at a high risk of defaulting?

In a lot of these discussions, loans seem to be confused with grant aid, and legislators seem to believe that offering loan assistance to high-need students is just as good as, say, increasing Pell grants. It isn’t. For a student that isn’t getting a high-yield degree and doesn’t have family resources to fall back on if she is in financial trouble, a student loan is a risky financial investment—and devastating if she defaults. Bankruptcy may be the only way for these students to get back on their feet.