Lessons from Bankruptcy Reform in the Private Student Loan Market

61 Pages Posted: 19 Apr 2018 Last revised: 9 May 2018

Alexei Alexandrov

Independent

Dalié Jiménez

University of California, Irvine School of Law; University of Connecticut School of Law; Harvard Law School - Center on the Legal Profession

Date Written: September 1, 2017

Abstract

This article explores the effects of the 2005 bankruptcy amendments in the private student loan market. Overall, our findings suggest that bankruptcy reform failed miserably at helping students.

Using a novel loan-level administrative dataset from the Consumer Financial Protection Bureau (CFPB) and econometric techniques, we quantify the (a) effect of consumers receiving lower prices as a result of the law and (b) the demand-expansion effect of lower prices leading new consumers to enter the market. Overall, our findings suggest that bankruptcy reform failed miserably at helping students.

First, we show that BAPCPA did not have a significant effect on the price of loans for the lowest credit score individuals relative to individuals with higher credit scores. In other words, students became effectively unable to discharge their loans in bankruptcy, but did not experience a compensating decrease in price. Second, we do see an increase in loan volumes, but since we do not observe a change in prices and we find that the price elasticity of demand for student loans is not significantly different from zero, we do not attribute this change in originations to a price effect. It is thus easy to argue that BAPCPA was not very helpful to students: they lost the ability to discharge their private student loans, but received no discount in return.

Given these findings, we offer some recommendations to reform how student loans are treated in bankruptcy and to regulate private student loans. First, we join with many others in calling for an amendment to the Bankruptcy Code to treat PSLs in the same way as credit cards or other types of unsecured debt are treated. That is: PSLs should be automatically dischargeable in bankruptcy unless the bankruptcy judge finds that the bankruptcy petition has been filed in bad faith. This is, we think, the simplest and best solution to the problems we identify.

Nonetheless, we recognize that rolling back the protection PSL lenders obtained in 2005 may be a hard sell politically. A number of bills have been proposed attempting to do just that and none have gained much traction. Consequently, we propose an alternative. Given students’ inelastic demand and the fact that PSL lenders are in a better position to know the true likelihood of loan repayment, the CFPB should implement an ability-to-repay rule similar to the one they have implemented in the mortgage markets. In other words, private student loan lenders would incur liability to borrowers if they originated loans without verifying a borrower’s ability to repay that loan. Because this verification is a complex endeavor, we outline some of the features of PSLs that could be packaged as a “qualified PSL,” a safe harbor to the ability-to-repay rule.

Keywords: student loans, private student loans, bapcpa, bankruptcy, bankruptcy reform, 2005, cfpb, consumer financial protection bureau

JEL Classification: D12, D18, D21,D40, D63, k35

Suggested Citation

Alexandrov, Alexei and Jiménez, Dalié, Lessons from Bankruptcy Reform in the Private Student Loan Market (September 1, 2017). Harvard Law & Policy Review, Vol. 11, No. 1, 2017; UC Irvine School of Law Research Paper No. 2018-34. Available at SSRN: https://ssrn.com/abstract=3132648

Alexei Alexandrov

Independent

No Address Available

Dalié Jiménez (Contact Author)

University of California, Irvine School of Law ( email )

401 E. Peltason Dr.
Ste. 1000
Irvine, CA 92697-1000
United States

HOME PAGE: http://www.law.uci.edu/faculty/full-time/jimenez/

University of Connecticut School of Law ( email )

65 Elizabeth Street
Hartford, CT 06105
United States
860-570-5114 (Phone)

HOME PAGE: http://www.dalie.org

Harvard Law School - Center on the Legal Profession ( email )

1585 Massachusetts Avenue
Wasserstein Hall, Suite 5018
Cambridge, MA 02138
United States

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