Goodfellas

Most of us have seen movies about the Mafia. One of the ways they earn money is by making loans. Have you ever seen what happens when somebody can’t pay them back? It’s not pretty. Usually you walk (or hobble) away with a few bruises and broken bones… if you’re lucky. And that only buys you some precious time until they come calling again.

That brings us to an uncomfortable segue about student loans. It can be very difficult (if not impossible) to eliminate what you owe on student loans, even if you file for bankruptcy. After all, the same government that writes the rules for lending student loan money (90% of which is backed by the government) also writes the bankruptcy rules. Am I saying the government is acting like the Mafia? Not necessarily. But I’m not not saying it either. 

The Don

It was reported Tuesday that President Barack Obama has requested that administration officials review bankruptcy options for student loan borrowers. An official explained that this review would probably only involve student loans made by private lenders and not ones backed by the federal government.

If the government does decide to make changes to the rules regarding private student loans, bankruptcy filers may be able to reduce or eliminate their private student loan debt. This would be helpful to those who have a lot of private student loans.

Go Home and Get Your Shine Box

This all sounds like a gracious move by the government. But there’s a catch. Did you notice it? Parenthetically we learned earlier that 90% of student loans are backed by the federal government. It follows that only 10% of student loans are private student loans.

So if the government allows private student loans to be eliminated (or at least reduced) through bankruptcy, they aren’t doing anything about the vast majority of student loans that exist. And conveniently enough, the loans that would get eliminated are not the loans they back. 

If this change takes place it’s a good starting point, but not all that helpful unless you are one of the rare students whose loans are mostly private loans. The real test of the government’s willingness to help in this area will be if they choose to take a hit on the loans they back themselves.