McArdle: Adding injury to an already flawed law

Sen. Sheldon Whitehouse, D.-R.I., has introduced a bill that would allow people with high medical bills to bankrupt their student loans. I sympathize with the basic impulse, but this is absolutely the wrong way to go about it.

The inability to bankrupt student loans is … what's the word I'm looking for? Right — absurd. If people need bankruptcy relief, they need bankruptcy relief; there's no reason that debts owed to the government should get special deference in a bankruptcy proceeding. (Technically, student loan debts are not owed to the government, but most of the loans are guaranteed by the government, so ultimately, it's Uncle Sam who loses when you default.)

It's not like student loans somehow become especially more problematic if you also have high medical bills. I mean, sure, medical bills often go along with an income problem that makes it hard to pay back your loans. But many other things often go along with income problems that make it hard to pay back your loans. In fact, that's the definition of insolvency: You don't have enough income to pay back your loans.

That's why Congress should offer bankruptcy relief to everyone who is struggling with unpayable student loan debt, not just the handful who also happen to have large medical bills. Shackling people to their debt for decades is bad for them, as well as for society, as people and resources stagnate in place rather than moving on. That's why we have a bankruptcy code.

We should never have carved the special exemption for student loans out of bankruptcy protection; it makes the law more complex, and as I've written many times before, the proliferating complexity of the regulatory state has huge costs and should be fought at every opportunity. Now that we have a special exemption for student loans, we should definitely not increase the complexity even further by enacting a special exception to the exception. Instead, we should reduce the complexity — and the number of people sweating under unsustainable debt loads — by undoing our initial mistake.

Of course, this will have costs — Uncle Sam is, as mentioned, on the hook for those loans. But if we need a way to pay for it, we could trim back programs such as Income-Based Repayment that offer broad subsidies to people who may not need them. Even better, we could cut back on indiscriminate lending to anyone who enrolls in graduate school. People who are willing to go to bankruptcy court and petition a judge to erase their debts at the expense of a lawyer, a trashed credit report and no small amount of personal shame are the ones who are truly desperate. And they are the ones we should be most focused on helping, not millions of middle-class kids with relatively small debt burdens.

Megan McArdle is a columnist for Bloomberg View.