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.

Student loan debt and defaults have been steadily rising, igniting public worry about the associated public and private risks. This has led to controversial regulatory attempts to curb defaults by holding colleges, particularly those in the for-profit sector, increasingly accountable for the student loan repayment behavior of their students. Such efforts endeavor to protect taxpayers against the misuse of public money used to encourage college enrollment and to safeguard students against potentially risky human capital investments. Recent policy proposals penalize colleges for students’ poor repayment performance, raising questions about institutions’ power to influence this behavior. Many of the schools at risk of not meeting student loan default measures also disproportionately enroll low-income, nontraditional, and financially independent students. Policy makers therefore face the challenge of promoting the efficient use of public funds and protecting students while also encouraging access to higher education.