“Student loans are not like other forms of consumer debts-they are a direct result of public policy…For the borrower, we acknowledge the different nature of the debt by making it nondischargeable in bankruptcy, meaning that he or she has a higher “moral” obligtation to repay the debt over other consumer debts.”—Paul Combe, President of American Student Assistance (Chronicle of Higher Education, May 15, 2009)
Mr. Combe envisions a moral hierarchy when it comes to debt repayment, but how would such a system work? Would students always have a heightened duty to repay loans? What if the student is seeking relief to buy medicine for a gravely ill friend? What if she is disabled and can no longer work? What if she gambled the money away? How would the morality spectrum be applied in these cases? Ironically, the gambling debts in the last scenario would probably be dischargeable, but not the student loans.
Granting relief based on a subjective sense of morality is inefficient and ultimately impossible. By all accounts, most students are optimistic when they take out loans, assuming that school will work out and that they will be able to repay the loans. Is it really “immoral” if life doesn’t work out as planned for them?
The policy question is whether a presumed lack of morality is a reason to deny debt forgiveness. The truth is that bankruptcy policy is much less about fairness or morality and more about the pragmatic need to offer fresh starts to many debtors. As Megan McArdle wrote in a recent Atlantic article, by the time someone files for bankruptcy, the time for fairness is already long past. Bankruptcy is the legal recognition that someone lacks the resources to meet financial obligations. Our system works well, according to McArdle, precisely because it sets aside our instincts for just desserts and instead focuses on minimizing the costs to everyone. There are many rules in place to ensure that only borrowers who are financially distresed get relief. Morality is not the guiding force behind the system.
On a more pragmatic level, those who tout a morality-based system would quickly find that not everyone lives by the same moral code. Some follow a secular morality that teaches empathy for others. Among religions, there are different attitudes toward debt forgiveness, but most aim to avoid the ancient practice of debt slavery. Chapter 15 of Deuteronomy mentions the need for debt forgiveness, which sounds a lot like bankruptcy. The Koran includes passages about granting debtors time to repay debts if they are in distress.
Injecting morality is not relevant and ultimately destructive of the fresh start concept. It could be useful perhaps if the goal is to shame immoral people, but that isn’t what’s really going on here and we should stop talking about it that way.