Private student loans are unsecured consumer debt. Both unsecured consumer debt, such as credit cards, and secured debt such as auto loans and mortgages, are dischargeable in Chapter 7 bankruptcy. The only financial obligations that are not dischargeable in bankruptcy are things like court-allocated fines and child support, as well as federal student loans. At first blush, it would seem that the burden of proof is on those who say that student loans should be treated differently from all other forms of debt.
The adverse consequence arising from the current situation is that simply by virtue of being enrolled in an institution of higher education, including cosmetology school, people are able to borrow $50, $100, or $200,000 in unsecured loans, completely without regard to their ability to repay. If their income after leaving their programs falls short of the amount required to repay the loans, they then have absolutely no recourse.
These people are just like people who have taken out subprime mortgages, except the bank can't take the house back. There is no house.
Student Loan Justice has many tales of people who have committed suicide or fled the country after reaching this dead end. Or they may just abandon their aspirations, and/or live in poverty.
The adverse consequence, some argue, in making private student loans dischargeable in bankruptcy is that banks would become more cautious about their risk. The loans would become more expensive, and banks may try to determine if someone will be able to pay back the loan, based on their course of study or other factors.
Should lenders in general become more cautious about the risk of loans? YES.
Should they try to determine if the loans they make will be affordable to borrowers? YES.
This is what correction in the credit market looks like. Turning off the faucet of easy credit
may be painful but is necessary for mortgage lenders, credit card marketers, and all other types of debt.
If this necessary correction results in adverse social consequences, rather than continue the ability of banks to make money risk-free off the backs of students, maybe we need to think about shrinking the role of the private sector in higher education finance, and strengthening the commitment of state and federal governments to ensure higher education access. This means increasing financial aid, providing low-cost loans at the government's rate of capital, protecting borrowers, and controlling tuition increases. Unaffordable private debt does not equal higher education aid.