Student-Loan Bankruptcy and the Signaling Model of Education

Matthew Yglesias points out:

But there’s something special about student loans. Two things, in fact. If you default on your mortgage, the bank gets to take your house. Same thing with an auto loan. And if you can’t pay your credit card bill, you can discharge the debt in bankruptcy. But the lender can’t repossess your degree, and the 2005 bankruptcy bill made it impossible to discharge the debt.

Wait a moment… Why can't a degree be repossessed? According to the signaling model of education (commonly found at EconLog and Overcoming Bias), college degrees are mainly an expensive way to signal a combination of intelligence and reliability. If someone defaults on a student loan, it makes sense for the degree to be revoked as his/her reliability is now in doubt.

In any case, prior to 1998 student loans were bankruptable. The very next year a long-dormant student protest movement came back from from the dead, filling a much-needed gap in political discourse. The non-bankruptable nature of student loans is a recent and regrettable innovation. It's not a traditional feature of capitalism.

My slogan for cutting off the oxygen supply of Occupy Wall Street: Forward to 1998!