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For All Our Good, Let Student Debtors Go Bankrupt

"We need to reform the nearly four-decades-old policy of blocking borrowers from discharging student loans in bankruptcy, a policy that only makes sense for good loans for good programs," said David A. Bergeron, co-author of the CAP report and vice president for postsecondary education there, in a press release. "Today's student-debt levels were unheard of when Congress last took up this issue, and our nation's bankruptcy laws should reflect that change."

The report is not the only sign of changing perceptions about the issue. This past January, U.S. Sen. Dick Durbin introduced the "Fairness for Struggling Students Act," which would make private student loans dischargeable like other forms of private debt. The bill floundered in the Senate but did call more political and public attention to the issue.

CAP cites the Durbin bill as a step in the right the direction. Unlike the Durbin bill, though, the CAP report supports inclusion of federal loans for bankruptcy, since private loans account for only 15% of all student loan debt.
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There are also concerns that without the option of bankruptcy for all student loans, the continued rise of college costs will require students to take on ever-higher amounts of debt and discourage them from pursuing more diverse career paths.

In particular, a working paper by Princeton professor Jesse Rothstein argues that to pay off student debt, students will be more likely to forgo jobs in social service and nonprofit sectors in favor of higher-paying positions that do not necessarily play to their strengths or passions. There might be also be a lack of entrepreneurship, as those saddled with large amounts of debt will avoid the risk-taking necessary to get business ventures off the ground.

Such claims are not without merit. Statistics reveal that young adults are putting off or altogether abandoning what was once seen as cornerstones of adulthood, such as buying cars or homes, starting families or even just living independently. Pew Research reported last year that three in 10, or 29%, of people ages 25 to 34 lived with their parents.

According to demographer Cheryl Russell of New Strategist Publications, "debt, coupled with double-digit unemployment, has hobbled millions of young adults who would have bought homes, married, had children and feathered their nests with all the middle-class goodies that keep our economy humming."

"Rising student debt has been eating into the housing and auto markets," wrote Brad Plumer in The Washington Post in April, while many argue that letting students overburdened by student loans go bankrupt would actually invigorate the overall economy.

"This entire system must be overhauled," wrote Salon contributor David Dayen. "Otherwise, it will continue to damage our economy by indenturing talented students, our greatest renewable resource."
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