Durbin seeks to make student loans eligible for bankruptcyCurrently, student loan obligations cannot generally be discharged by declaring bankruptcy. Senator Dick Durbin of Illinois wants to change that. While the measure aims to give indebted consumers a little extra relief, the new rule could have three unintended consequences:
- It could raise the cost of student loans. The temptation for students freshly out of college and with large debt obligations to dismiss those obligations by declaring bankruptcy would be considerable. This would greatly increase the riskiness of student loans, causing banks to charge future students more for those loans.
- It could restrict the availability of student loans. Given the heightened risk of loss, some banks would simply get out of the business, cutting off a potential source of educational financing.
- It could keep savings account interest rates down. When lending is profitable, banks have an incentive to offer higher savings account rates. Dampening the profitability, or eliminating a line of lending business altogether, makes banks less likely to offer higher savings rates.
President Obama seeks to expand federally subsidized student loansThe President wants to expand the Federal Perkins Loans Program from $1 billion to $8 billion. On the surface, this means more low-cost loans for students. But given the cost of subsidizing these loans, and the fact that federal student loans are seeing rising default rates, there would likely be a cost to taxpayers.
Expanding the federal loan program could also squeeze some private lenders out of the marketplace, meaning that in the event of a taxpayer backlash that reduces the federal program, there would be fewer private loan providers to step in to fill the gap.