Bankruptcy reform in 2005 restricted debtors’ ability to discharge private student loan debt. The reform was motivated by the perceived incentive of some borrowers to file bankruptcy under Chapter 7 even if they had, or expected to have, sufficient income to service their debt. Using a national sample of credit bureau files, we examine whether private student loan borrowers distinctly adjusted their Chapter 7 bankruptcy filing behavior in response to the reform. We do not find evidence to indicate that the moral hazard associated with dischargeability appreciably affected the behavior of private student loan debtors prior to the policy.
As the authors conclude that, absent any evidence of moral hazard by allowing borrowers to discharge private student loans, “policymakers are faced with the challenge of weighing the burden placed by restrictions to bankruptcy protection on struggling nonopportunistic debtors against the benefits of expanded credit availability.”
While certainly a valuable corrective to the prevailing belief that borrowers are the parties that game the system, this study is only partially accurate or complete.… Read More