Report Calls for Bankruptcy Protection for the Most Vulnerable Borrowers

August 20, 2013

Allowing borrowers to discharge some student loans in bankruptcy would provide relief to the most vulnerable and would foster a "race to the top" among lenders and institutions, says a new report by the Center for American Progress.

The paper, "How Qualified Student Loans Could Protect Borrowers and Taxpayers," was written by Joe Valenti and David A. Bergeron, a 30-year veteran of the U.S. Education Department who joined the center this year.

In it, they argue that efforts by some members of Congress to restore bankruptcy protections to borrowers of private student loans represent a "valuable first step" but "ignore the reality that not all private loans are bad and not all federal loans are ultimately good."

Instead, they suggest, lawmakers should move to make riskier loans—federal and private—dischargeable in bankruptcy.

Under their proposal, student loans would be categorized as eligible for discharge through bankruptcy or not based on their terms and conditions, and the likelihood of their repayment.

Loans would not be eligible if they carried "reasonable" interest rates and fees; offered deferment and forbearance provisions similar to today's federal loans; provided access to income-based repayment; and were made to students attending institutions with a decent history of repayment.

All other student-loan debt would be dischargeable.

Limiting dischargeability to student loans that are less likely to be repaid, and publicizing the status of loans, would help students avoid dangerous debt and would provide an "exit strategy for the most vulnerable," the report's authors argue. It would also create "strong incentives" for colleges to improve their student outcomes and for private lenders to offer better terms and conditions to borrowers, they write.