In 2005, Congress made it exceptionally difficult to discharge private student loans in bankruptcy. Federal student loans have been presumptively non-dischargeable since 1976, but those loans are granted regardless of income or credit and the change was justified by the need to protect the federal fisc. That rationale does not apply to private student loans, where interest rates and qualification are already based on the lender’s assessment of risk. But proponents argued that removing bankruptcy protection would increase the market for private loans, making them more available and affordable to students.
Professor Dalié Jiménez’s research with economist Xiaoling Ang shows that may not be what happened. Their research is ongoing, but perhaps the most surprising early finding is that private student loans actually became more expensive with loan interest rates increasing an average of 3.5 basis points after the law change. “This is the opposite of what economic theory and Congress would predict regarding the effect of bankruptcy protection,” Jiménez says. “Making it harder for students to seek debt forgiveness should make these loans much more valuable and lead to interest rates decreasing or at the very least staying the same. Our results suggest that the reverse happened. In just the first quarter of loans originated after the law change, students overall paid approximately $382,950 more per year. And while the total number of loans did significantly increase, the average credit score of qualifying borrowers only decreased slightly.”
Particularly given the recent congressional focus on student loans, there has been substantial interest in the project. Professor Jiménez has already been invited to present this work at the Conference on Empirical Legal Studies, the Midwestern Law & Economics Conference and at the W.E. UpJohn Institute, Spencer Foundation and Ford Foundation’s Conference on Student Loans. The first publication of these findings will be in an upcoming UpJohn Institute Press volume.
Professor Jiménez, who was trained at Harvard Law by now-Massachusetts Senator Elizabeth Warren, came to UConn Law in 2012 after serving as a policy fellow with the Consumer Financial Protection Bureau.