Why Can’t Student Loan Debt be Discharged in Bankruptcy? : How the High Cost of Higher Education is Dragging the Economy Down

The high cost of a higher education is saddling many Americans with debt they can’t afford and can do little about. As a bankruptcy attorney, dealing with clients who are facing large student loan debt can be very frustrating because, while I can help them with their credit card and medical debt, for most working people there is no way to discharge their student loans in bankruptcy.

This wasn’t always the case. Up until the mid-1970’s, both federal and private student loans were eligible for discharge in bankruptcy. Congress than began scaling back the ability to do this, first by excluding federal student loans from discharge. The next step Congress took was to prevent private student loans guaranteed by a non-profit agency from being discharged in bankruptcy. The final nail in the coffin known as the bankruptcy solution to student loans came in 2005, in what was named the Bankruptcy Abuse Prevention and Consumer Protection Act. As many commentaries have noted, this Act did very little to prevent bankruptcy abuse and protect consumers, but it did however make it nearly impossible to discharge student loans in bankruptcy. Under the new law, in order to discharge a student loan, a debtor must now show that payment of those loans would constitute an undue burden on them and their dependents. While different courts use different standards to determine what “undue hardship” means in terms of student loans, many courts feel that if you are able to work than you are able to pay your student loans. In addition, under the new law in order to discharge student loans, the debtor must now file an adversary proceeding against the student loan creditor to determine discharability. This adds an added layer of cost and complexity to a bankruptcy case which may price an already struggling debtor out of bankruptcy.

What does all this mean to the US economy? Well let’s look at the numbers. Currently, Americans are carrying more than 1 trillion dollars in student loan debt. Student loan debt accounts for more than any other type of consumer debt. At the same time, with the job markets still sluggish due to the slow recovery, fewer graduates are able to find gainful employment. More often than not, recent graduates are only able to find part time work or work that pays much less than what they expected when they took out their student loans. Any disposable income these recent grads have will be used to pay their student debt. Consumer spending accounts for 2/3 of the US economy. If the next generation can’t afford to shop because they are stuck in low paying jobs with an expensive student loan payment, that doesn’t bode well for the economic recovery.

So what is the answer? Putting a priority on education and making higher education more affordable is one option. Another option is allowing graduates who will never realistically be able to repay their student loans to discharge them in bankruptcy. The U.S. Department of Education and Consumer Financial Protection Bureau recently urged Congress to consider revising the Bankruptcy law to allow the discharge of private student loans. Senator Dick Durbin, a Democrat from Illinois, has introduced legislation in the last three sessions of Congress that would do just that. Unfortunately, with big banks and their ability to lobby against bankruptcy reform, the legislation is going nowhere. Unless lawmakers act soon, the combination of expensive student loan debt coupled with fewer job opportunities, might be the straw that breaks the economic recovery’s back. In the land of the American dream, getting a higher education shouldn’t turn into a nightmare.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code