The full reason is that preventing bankruptcy is the only way to keep interest rates low and make the loans widely available.

If bankruptcy was allowed then the obvious play would be to take the loan, max out credit cards right before graduation, then declare bankruptcy before you get your first job.

Lenders would respond by increasing interest rates dramatically and restricting loans to those who had assets. This would basically turn into loans being for people with wealthy parents or having eye-watering interest rates.

That answer is still begging the question of why it matters that bankruptcy rates stay low.

It's obvious that bankruptcy costs the lender, but how that cost gets absorbed is very important here. A mortgage or a car loan are secured debts, where the lender can repossess and sell the collateral, to pay off most or all of the losses if the borrow defaults on the loan. A student loan is an unsecured debt, so any defaults have to come out of the interest of the rest of the borrowers serviced by that loan program.

The more borrowers default on their payments, the higher the interest rate is needed to cover the write-downs. Without any protections against defaulting, interest rates would have to be near those of credit cards, while limiting when student loans can be discharged limits how much needs to be written down, which keeps interest rates lower.

Higher interest rates would not only make student loans cost more, it would also reduce their availability and increase the default rate, which could create positive feedback, causing the rates to increase significantly faster than inflation. Combine that with incentivization for college attendance already causing tuition itself to increase significantly faster than inflation, which itself makes student loans increasingly necessary, allowing student loans to be discharged during bankruptcy could have compounding effects on the fragile system that currently props up college attendance rates.

That still leaves the question of why the government should incentivize a significant portion of their constituency to be in college, (more than 1 out of every 13 US adults are currently enrolled) but I'll have have leave that question for politicians or maybe even voters.

> it was to discourage students from immediately declaring bankruptcy upon graduation.

Yes, this was a thing in (IIRC) the late 70s / early 80s, and the fed crackdown on the non-dischargeability of school loans in bankruptcy was enacted very quickly in response.

I myself got my bachelors in '79 and read about this idea and did not try it cos it was so incredibly unethical (and it sounded risky). In the words of the infamous Vince Lombardi, "Nice guys finish last."

> There is no evidence that students were actually doing this in any significant numbers.

premature optimization is the root of all evil. Seems like we shouldve actually shown that kids would do that before putting it into law

You can't really tell people that they just can't be bankrupt though. What are they supposed to do if they have debts they can't pay but they're not allowed to declare bankruptcy because they pinky swore they wouldn't do it seven years ago?

You would have to prove that you are unemployable to achieve any meaningful reduction in debt. For degrees that are demanded by the job market you wouldn't be able to declare bankruptcy and you would first have to make a reasonable attempt at paying off your loan.

Basically proving the point that the loan shouldn't have been given out in the first place.

I feel the interests would rise to accommodate for all the bankruptcies that inevitably happen exactly 7 years after

You could say the same about all government programs, including pensions and defense. Yet somehow popularly-elected governments keep finding themselves maximizing public utility. A curious property indeed.

But the return on that subsidy is positive so why not do it?

Well someone has to do it as its bulk of NATO’s funding.

It also should not waste tax payer’s money of worthless degrees

Bankruptcy is still inconvenient. But mostly, people would be less able to get loans and then colleges would get to pick between reducing prices or having only a few rich students.

Whats to stop people in their 20s now taking out tons of credit then declaring bankruptcy without the college?

We could also just decide to provide people higher level of education as a right. And, put some Medicare level pricing in place for colleges and universities to get cost in check.

I personally would want to see it with greater student participation/testing. The US education has been watered down to be so easy specifically because failing reduces LTV of a student. They want to just crank out degrees to as many people as they can. I personally think we need to figure out the healthy balance of education we need, because college for all isn’t it. Then just pay for them to learn at a high expectation level. Private schools will still exist to pump out full price degrees and that’s fine too.

> Everyone would do it.

No, they wouldn't. Source: go back a couple decades, and student loans had low interest rates and were dischargeable in bankruptcy. It was an option. And, in fact, practically nobody did that.

Maybe not everyone, but certainly lots of unethical people would do it, and there are lots of those. They'd post unbearably smug posts on LinkedIn about it too, calling everyone a sucker who didn't walk away from their $200k in student loans via bankrupcty.

The justification for student loans being exempt from bankruptcy is simply that there is no asset to be repossessed. Car loans, mortgages, and HELOCs are different. Credit cards have very high interest to pay for the higher risk. I guess we could have student loans with 29% interest, would that be preferable?