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Making student loans dischargeable in bankruptcy


Student loans aren’t dischargeable in bankruptcy except under extraordinary circumstances. This unjust, inefficient, and socially destructive exception to the bankruptcy laws was extracted from Congress by shills for the financial industry, who in the 1970s began mounted an effective propaganda campaign based on classic Nixonland tropes about dirty hippies flipping off the man and then making millions off the system anyway etc. etc.

Getting rid of this exception is going to be a long hard political battle. A good place to start is with professional degrees in general, and law degrees in particular. The law school scam is in some ways an ideal launching pad for a campaign to make student loans dischargeable.

(1) More than any other supposedly respectable institutions of higher education, law schools have taken full advantage of the combination of federal loan financing and non-dischargeability to price-gouge naive students, through highly deceptive marketing practices, that would never be tolerated if engaged in by ordinary businesses.

(2) As a result, law school graduates carry truly extraordinary levels of student debt. A recent estimate puts the percentage of student loan debtors who carry balances of $100,000 or more in student loans as around three percent. Yet the average (mean) educational debt of people currently enrolled in law school is going to be about $150,000 at graduation.

(3) A professional degree that is a prerequisite for obtaining a license to practice that profession is a perfect candidate for discharge through bankruptcy. This is because essentially all of whatever net positive economic value that degree has is captured by whatever value it adds by enabling those who have it to obtain that professional license. This creates an opportunity for a simple, eminently fair trade: A graduate can give up his or her license to practice the profession in exchange for making the graduate’s student loans dischargeable.

Creating this opportunity would create real-world consequences for offering degrees that end up having negative net present value. (Omniscience isn’t a prerequisite for determining the net present value of an asset. A degree has negative net present value if the holder of it is at present willing to in effect give it back in return for consideration less than that which the holder paid for it. Obviously the right to discharge student loans in bankruptcy is much less valuable than actually getting your direct costs and opportunity costs incurred while attending law school refunded). In addition, allowing people to discharge student loans in exchange for renouncing their law licenses would begin to reduce the massive oversupply of lawyers in the American economy at present.

A law degree has economic value to the extent that the right to practice law has economic value. (It’s to say the least extremely unclear if a law degree is on net a positive on the typical law school graduate’s resume if that person isn’t practicing law). If holders of law degrees are willing to go to the extreme of renouncing the latter right, then what argument could there be for not allowing them to in effect treat the degree as a toxic asset, whose toxic effects should be able to be — very partially — ameliorated through bankruptcy?

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