Should student loans be forgiven and bailed out by the government?

I’m sure most people with large student loans love the idea of having them forgiven.  And the federal government may actually do this someday.  But there is a better way of dealing with the student debt crisis.

One alternative offered in the below video put out by LearnLiberty.org is changing the law so that student loans can be discharged in bankruptcy filings.  This would be advantageous for several reasons.

First, it would allow those students with no hope of paying back their loans the ability to have them discharged through bankruptcy, which is presently not allowed by current federal bankruptcy law.

And second, this would create a better incentive structure for lenders.  Right now lenders can count on the guarantee by the federal government that a loan cannot be defaulted on.  Therefore there are usually no collateral requirements for loans or other credit rules for loans to be issued.

If there is the possibility of a loan being discharged through bankruptcy, then lenders will be more choosy about who they issue loans to.

Prof. Lin explains:

Also, there would be less student loans issued in the first place so there would be less money flowing into higher education, creating the rampant inflation of tuition costs.  With less money going into the industry, colleges would be forced to lower their prices.

Getting the government less involved in the economy, as should be expected, always has positive consequences, as more market based incentives prevail.