Top 5 Reasons that Student Loans should be Dischargeable in Bankruptcy

President Obama’s executive order with regard to student loan debt relief doesn’t go far enough. Here are five reasons why the President and the Congress should go further:
1. Even the IRS Doesn’t Get the Protection that the Student Loan Creditors Enjoy.
When most people think of a creditor that is going to get its money, they think of the IRS. However, current law allows bankruptcy discharge of certain tax debts more than three years old if tax returns were filed a couple of years before the bankruptcy filing. It’s a little more complicated than just that, but the point is that if the IRS and state tax agencies have to take a bath sometimes in bankruptcy, why not student loan creditors?


2. Lenders Would be Discouraged from Lending Students So Much Money.

Talk about a dream customer for a lender: someone between the ages of 18 – 21 who is about to get an education that is expected to help that person earn $500,000 more, over a lifetime. Now throw in the fact that this person will probably never be able to get rid of the debt in a bankruptcy. Is the “availability” of this money related to tuition’s rise at double & triple the rate of inflation for the last 25-30 years? In a society where we finance that which we cannot afford, people will pay if they can borrow. Look at the housing market.

3. Lenders Would be Motivated to Make Deals with Student Loan Borrowers.

Right now, there is almost no motivation for a student loan creditor to make a deal with a borrower. Without bankruptcy as an option for most borrowers, the student loan creditor is encouraged to jack up bogus fees, accumulating interest and collecting portions of the debt when they can. In addition, consumer protection in general is conspicuously absent for student loan borrowers. There is no Statute of Limitations for student loan debt (not including private loans). Even the IRS doesn’t try to go after tax debt that is more than ten years old!

4. The Reason for Bankruptcy not being available for Student Loans, which Started in 1978, was Wrong from the Beginning.

The banksters got Congress to create the student loan exception to bankruptcy discharge by creating a scare campaign that students would go get college degrees and then immediately turn around and file bankruptcy to avoid paying for college. Former Rep. James O’Hara, who fought against the student loan exception to discharge, stated that the idea that students would abuse the system “existed primarily in the imagination.” Fraud is possible in any credit transaction, but students are the only borrowers automatically presumed to be cheats and thieves.

The truth is that when the bankruptcy discharge was available for federally funded student loan debt in the 1960s and early 1970s, there were a few abusive situations but it happened less than 1% of the time.

Even after the bar on the bankruptcy discharge was implemented in 1978, it was only a temporary waiting period: a student could not discharge student loan debt for five years after the beginning of the repayment period on the loan. In 1990 the waiting period was increased to seven years, and only in 1998 did it become a permanent bar.

In 2005, Congress included private student loans to the exception to bankruptcy discharge, giving privately funded loans the same protection previously reserved for loans funded or guaranteed by the federal government. There was very little (if any) public debate on this; however, the number of private student loans taken out by undergraduates has been in the rise since 2003, and is projected to go up in the future.

5. Boost Our Economy by Getting Certain Borrowers Out of a Virtual Debtor’s Prison.

People eligible for bankruptcy relief will not able to spend money on local goods & services if they will be paying student loans the rest of their post-bankruptcy life. Restoring the bankruptcy option to student loan debt is not as drastic as the controversial proposal to simply forgive all student loan debt in the U.S.; we are only talking about people who are able to get bankruptcy relief under a Fresh Start (Chapter 7) Bankruptcy, or an Individual Repayment Plan (Chapter 13), in which the borrower is eligible pay back part of the debts, according to the borrower’s income, over a period of 3 – 5 years.

Conclusion

This proposal simply seeks to treat student loan debt like any other debt, or at least put student loan creditors in the same position as the IRS. (See ten-year rule referenced above).

An obvious compromise would be to bring back the waiting period after the start of the repayment of the loan, such as existed for the 20-year period between 1978 and 1998.

Other fixes to be considered would be to bring back some basic consumer protections when it comes to student loan lenders, and to create a statute of limitations so that student loans cannot be purchased by debt buyers and revived as zombie debt for the rest of a person’s natural life.

But to have student loan debt in its current immortal, untouchable form is intolerable.