April 13, 2014
Bankruptcies Should Cover Student Loans, Too
Allowing student loan debt to be discharged under bankruptcy laws, as recently advocated by Sen. Richard Blumenthal, is a matter of fairness.
Currently, student loans are not dischargeable. Many people oppose the senator's proposal because they think it would be too easy for debtors to rid themselves of student loans and that they should be responsible for paying those loans back. What most people don't realize is that, with a few exceptions, almost every other kind of debt can be discharged in a Chapter 7 bankruptcy. Why do we discriminate when it comes to student loans?
Other debts that are not dischargeable are mainly those debts that are the result of a debtor's bad acts, such as government fines, criminal restitution and civil judgments for grossly negligent acts such as drunken driving. Other exclusions prohibit discharge for public policy reasons, such as debts due for child support and alimony. That these debts are non-dischargeable makes sense, but student loans?
Student loans are seen as a kind of good debt. They allow people to become better educated and find good employment in the future. Having more college-educated people is beneficial for our society and employers looking for skilled workers. This is in contrast to types of so-called bad debt such as credit card debt, which is mainly used for buying material goods with no foreseeable investment or value in the future.
Under the law, people with no student loans, but who max out their credit cards, are allowed to discharge that debt. But student loan debtors will always be prisoners to their school debt no matter how hard they try to get a good job and be responsible borrowers who pay their bills on time. Even if they lose their job, their house and can barely pay for basic necessities like food, they can never discharge their student loans. (There is one exception in the Bankruptcy Code known as undue hardship, but you basically have to prove that you have become so disabled that you will never be able to work in order to pay your student loan debt).
Like it or not, our bankruptcy system exists to give people a fresh start when they have truly hit rock bottom. Being in debt can be incredibly stressful if you cannot pay it back. Losing a job can be devastating, leaving many people with so much debt they can never get back on their feet. Providing a fresh start allows those people a life that is not inundated with unimaginable debt and debt collectors, with no foreseeable way out.
To be clear, bankruptcy filings are pretty rare and it is not an easy legal process. Filings will tend to increase when there is a recession (as we just experienced), but generally speaking most people — even those with a large amount of debt — do not file for bankruptcy. Some may not pay their debts on time, but most people do not have their debts extinguished through a bankruptcy court.
Congress should consider changing the bankruptcy code to address this inequity with student loan debt. Similar to other debts, those institutions that lend money to students (who are increasingly private lenders) must share in the risk that a small percentage of borrowers will file for bankruptcy. And if that risk exists, then maybe those lenders will be more careful with who they give student loans to, and in what amounts. Keeping people in a perpetual prison of enormous debt that they cannot pay is cruel and favors these lenders over all others. If irresponsible people can discharge their credit card debt, why can't responsible, well-intentioned graduates discharge theirs?
As Sen. Blumenthal emphasized, this should be an option of last resort, just as all other dischargeable debts are. Will there be people who abuse the system? There will be some, but the majority of people in this country (even young 20-somethings) will pay their debts if they can. We should not continue to impose unfair laws on them that don't apply to other types of debtors and lenders.
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