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Can student loans be bankruptcy friendly?

While making student loans bankruptcy-friendly became a cause célèbre on the left in the wake of Occupy Wall Street, in recent weeks the notion has found some support on the right as well. The catch is that some voices on the right suggest that the schools should be held accountable for the debt, not the taxpayer.

Sen. Elizabeth Warren, D-MA, has been a leading advocate for student debt reform, most recently proposing that older, debt-ridden former students be allowed to refinance their loans at lower rates, paying the bill by raising taxes on the wealthy. That bill stalled in the Senate earlier this summer.

But a few voices on the right now are sounding a similar theme, albeit with differences and provisos.

"Lending a student $60,000 to attend a private school he may have little chance of graduating from is not terribly different than the mortgage lenders who gave imprudent loans to people buying homes they could not really afford," writes Ike Brannon at the conservative Weekly Standard. "Both the school and the company that made the student loan get their money regardless of what happens to the student, and as a result neither has any compunction about helping a student attend a school where his prospects are poor."

Brannon goes on to to suggest that taxpayers needn't be left holding the bag. We could, he argues, "make the institution of higher learning assume their loan payments after a bankruptcy. That might make schools think twice before they admit a marginal prospect and charge them thousands of dollars for an education that might not do them much good, and it might make students think twice about disdaining lower-price options, such as the junior college near their home."

The notion that schools might respond to the risk of bankruptcy by being more selective in their admissions policy is not, of course, something likely to resonate with Warren, since it would tend to limit admissions and economic mobility for the highest risk students.

In any case, George Leef, writing at the Pope Center for Higher Education Policy, the heightened selectivity would be a feature, not a bug.

"Instead of trying to recruit any warm body who can use government loans to cover the tuition, schools would have to think about each student’s academic ability and future prospects," Leef writes. "Those who can scarcely read and show no evidence of interest in learning anything of value would be risky to admit. Instead of obsessing over students’ “diversity” or sports prowess or legacy status, admission committees would have to think about the likelihood that an applicant would later declare bankruptcy and stick the school with a large bill."

Leef argues that the accountability for debt would encourage schools not only to be more careful in who they admit. "They’d also have stronger incentives to ensure that those they do admit can’t just coast along without learning anything," he notes.

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