Megan McArdle’s recent article, “Don’t Count on Settling Those Student Loans” includes some helpful advice for student loan borrowers. She is right on that it is very difficult to settle student loans. Unfortunately she does not stop there.
McArdle goes on to perpetuate tired myths about student loan borrowers and bankruptcy. She states, without a shred of evidence, that once students have consumed the education, a “large number” seem to decide that “it wasn’t worth it” and that “…therefore someone other than them should have to eat the cost.” She concludes that this is the reason that Congress made it very difficult to shed student loan debt.
In fact, there is no good evidence that student borrowers are more likely to discharge loans in bankruptcy than other financially distressed consumers. As we wrote about in No Way Out and testified before Congress, the decision to treat student loans differently in bankruptcy came about in spite of studies, many of which came out at the time the policy was established, discrediting the reports of student “abuse” of the bankruptcy system.
Congress has acknowledged the pressure from the anecdotal reports of abuse. For example, a 1977 House Report on this issue stated that: “The sentiment for an exception to discharge for educational loans does not derive solely from the increase in the number of bankruptcies. Instead, a few serious abuses of the bankruptcy laws by debtors with large amounts of educational loans, few other debts, and well-paying jobs, who have filed bankruptcy shortly after leaving school and before any loans became due, have generated the movement for an exception to discharge. In addition, a high default rate has been confused with a high bankruptcy rate, and has mistakenly led to calls for changes in the bankruptcy laws.” (H.R. Rep. 95-595, 1st Sess. 1977, 1978, 1978 U.S.C.C.A.N. 5963, 6094, 1977 WL 9628.)
I heard the same tired conclusions at the recent student aid administrator’s conference. A few speakers stated, again without any evidence, that students are more likely to want to discharge student loans after they get out of school because after all, they have already obtained the education, so why pay for it?
There are plenty of anecdotes to support these conclusions, but there are also plenty to support the opposite conclusion—that students will do everything they can to pay back education debt even if it means huge financial sacrifices. That is why policy based on anecdotes is so irresponsible. The media exacerbates this problem by making general conclusions based on a few interviews. Struggling students deserve better.