A Wall Street Journal editorial today took a very negative view–rightly, in my opinion–of President Obama’s proposal to let student borrowers discharge private student loans through bankruptcy. By law, repayment of federally guaranteed loans cannot be avoided this way. But the Journal wrote: “If there’s not a great outcry over letting borrowers stiff private lenders, eventually you can expect the rollout of a similar policy for government loans.”
And here’s another point: Even students who take out federally-guaranteed student loans first often need private loans also when they reach the cap applied to Direct Loans and still need to borrow for college expenses. By raising the possibility of discharging some of these loans through bankruptcy – unlikely though it is that Congress will go along – President Obama will drive up the interest-rate cost of private student loans. Private lenders do not need additional risk of default through easier student bankruptcy. They would raise rates and thereby make college less affordable.
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There is no reason to treat loans differently from each other. The higher interest rate will make borrowers think twice, and the lenders be more careful in choosing borrowers. All to the good.