Private Student Loans and BAPCPA: Did Four-Year Undergraduates Benefit from the Increased Collectability of Student Loans?
Consumer Financial Protection Bureau
University of Connecticut School of Law
January 31, 2014
(Forthcoming) UpJohn Press
Since 1976, Congress has progressively amended the bankruptcy laws to treat various kinds of student loans differently from other unsecured debt. Until recently, this differing treatment was restricted to loans insured or originated by federal or state agencies, or by nonprofit institutions. In 2005, student loans originated by private companies — loans that were risk-priced at origination and not backed by the government — were added to the list of educational loans that are presumptively nondischargeable in bankruptcy. This means that unlike personal loans, credit card debt, or virtually any other type of unsecured debt, a debtor needs to prove to a bankruptcy court in a special proceeding that continuing to repay her student loans after bankruptcy would impose an “undue hardship” on her or her dependents. Originally the exception for student loans was justified in terms of preventing fraud and protecting the public fisc and the federal student loan program; neither justification applies to the provision of loans by the private market. The proffered rationale for the latest change was to ensure availability of loans originated by the private market (“private student loans”) to students. Until now, there has been little to no evidence of the effects of this change.
We develop and test a theoretical model for the plausible effects of the law change on private student loans granted to students at four-year undergraduate institutions. Using a unique dataset of private student loan originations before and after the 2005 bankruptcy law change, we test that model and its resulting hypotheses using OLS, Oaxaca-Blinder, matching, and difference-in-difference methods. We find that the overall cost of private student loans at four year undergraduate institutions increased an average of 3.5 basis points as a result of the law change. We also find that the credit score composition of borrowers post-law change skewed towards the lower end of the credit score spectrum but the average borrower credit score only decreased slightly in practical terms. Finally, the volume of loans originated also increased approximately 60 percent in the post period, the majority of which is attributable to the law change.
Number of Pages in PDF File: 45
Keywords: bankruptcy, student loans, matching, law change, education, consumer finance, BAPCPA
JEL Classification: D1, D78, K35, D18, D12, C9, I22, I28, K00Accepted Paper Series
Date posted: September 29, 2013 ; Last revised: March 5, 2014
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