That's the name of this article by Xiaoling Ang of the Consumer Financial Protection Bureau and law professor Dalie Jimenez. For many years, federally guaranteed student loans have been non-dischargeable in bankruptcy, unless the debtor can show "undue hardship" (which the courts have interpreted very narrowly). Congress later extended that non-dischargeability policy even to entirely private student loans, which gave those loans a preferred status over almost all other unsecured private loans. Here is the abstract:
Since
1976, Congress has progressively amended the bankruptcy laws to treat
various kinds of student loans differently from other unsecured debt.
Until recently, this differing treatment was restricted to loans insured
or originated by federal or state agencies, or by nonprofit
institutions. In 2005, student loans originated by private companies —
loans that were risk-priced at origination and not backed by the
government — were added to the list of educational loans that are
presumptively nondischargeable in bankruptcy. This means that unlike
personal loans, credit card debt, or virtually any other type of
unsecured debt, a debtor needs to prove to a bankruptcy court in a
special proceeding that continuing to repay her student loans after
bankruptcy would impose an “undue hardship” on her or her dependents.
Originally the exception for student loans was justified in terms of
preventing fraud and protecting the public fisc and the federal student
loan program; neither justification applies to the provision of loans by
the private market. The proffered rationale for the latest change was
to ensure availability of loans originated by the private market
(“private student loans”) to students. Until now, there has been little
to no evidence of the effects of this change. We develop and
test a theoretical model for the plausible effects of the law change on
private student loans granted to students at four-year undergraduate
institutions. Using a unique dataset of private student loan
originations before and after the 2005 bankruptcy law change, we test
that model and its resulting hypotheses using OLS, Oaxaca-Blinder, and
matching methods. We find that the overall cost of private student
loans at four year undergraduate institutions increased an average of
3.5 basis points as a result of the law change. We also find that the
credit score composition of borrowers post-law change skewed towards the
lower end of the credit score spectrum but the average borrower credit
score only decreased slightly in practical terms. Finally, the volume
of loans originated also increased three-fold in the post period, the
majority of which is attributable to the law change.
