Student loans and lender risk

Bankruptcy tends to make lenders more cautious when it comes to making loans. The prospect of borrowers going into default and declaring bankruptcy makes lenders nervous since bankruptcy, or at least Chapter 7, means they walk away with pennies compared to the outstanding debt.

With student loans we see what happens when that risk doesn’t exist. Government guarantees plus the protection of student loans from bankruptcy discharge means that lenders have much lower risk lending to just anyone, regardless of their credit history. And regardless of their major.

With all of the talk on how to alleviate the current student debt “crisis”, the one change that I’m sure both sides could agree upon is merely ending the bankruptcy protection on student loans. Make them able to be discharged in bankruptcy and lenders will start feeling the pinch.

But you’ll also see student lending dry up as they pull back on their lending to reduce their risk of loss. I wouldn’t really call that a bad thing.