Strategic Default Among Private Student Loan Debtors: Evidence from Bankruptcy Reform

Rajeev Darolia () and Dubravka Ritter
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Rajeev Darolia: Martin School of Public Policy and Administration University of Kentucky Lexington, KY 40506

Education Finance and Policy, 2020, vol. 15, issue 3, 487-517

Abstract: Bankruptcy reform in 2005 restricted debtors’ ability to discharge private student loan debt. The reform was motivated by the perceived incentive of some borrowers to file for bankruptcy under Chapter 7 even if they had, or expected to have, sufficient income to service their debt. Using a nationally representative sample of millions of anonymized credit bureau files, we examine whether private student loan borrowers distinctly adjusted their Chapter 7 bankruptcy filing behavior after the reform. We do not find evidence to indicate that the moral hazard associated with dischargeability appreciably affected the behavior of private student loan debtors prior to the policy. Thus, our findings do not provide empirical support to the theoretical concerns about pervasive strategic default that inspired lawmakers to make private student loan debt largely nondischargeable.

Date: 2020
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Working Paper: Strategic Default Among Private Student Loan Debtors: Evidence from Bankruptcy Reform (2017)
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