Prior to 1976 student loans were completely dischargeable in bankruptcy. It wasn’t until the mid-1970s, a time when higher education tuition was actually still affordable, that legislation was enacted to constrain bankruptcy protection for student loan borrowers. As we look at the role that bankruptcy plays in the troubling economics of the past several years, the story starts a raise a few eyebrows.
Quick History of Student Loan Nondischargeability Amendments
The reasons behind Congress’ choice to single out student loans from other kinds of unsecured debt are unclear. In the mid-1970s there was some unsubstantiated concern (media hype, really) that student borrowers were abusing bankruptcy protections, which is what triggered Congress and the GAO to investigate the matter. However, as the allegations against students were discovered to be unfounded, it’s difficult to say what started Congress down the student loan nondischargeability road in the first place. Especially with experts lining up to denounce the new laws: “[students] should not be singled out for special and discriminatory treatment. I have the further very literal feeling that this is almost a denial of their right to equal protection of the laws … Nor do I think has any evidence been presented that these people, these young people just beginning their years on the whole should be singled out for special and as I view it discriminatory treatment. I suggest to you that this may at least in spirit be a denial of their right to equal protection with the virtual pole star of our constitutional ambit,” testified University of Connecticut law professor Philip Shuchman. What we do know is that in 1976, a series of legislation began to make student debt increasingly difficult to discharge in bankruptcy; today it’s next to impossible.
The Housing Bubble and Bankruptcy Protection
In 2005, dramatic reform to U.S. bankruptcy law made it significantly more expensive to declare personal bankruptcy. Not surprisingly, this resulted in a significant decline in individual filings. The reform is estimated to have caused many, many additional mortgage defaults and foreclosures than would not have occurred had bankruptcy been more available to homeowners. It is also estimated that this contributed to the ensuing financial crisis in 2008. Furthermore, evidence suggests that the ability to file for bankruptcy delays foreclosure for those struggling to retain their homes. These factors indicate that struggling homeowners can benefit greatly from bankruptcy protection, and the overall economy along with them.
Student Loans and Nondischargeability
Student loans are in much the same boat, or bubble, really; except it’s even harder to gain bankruptcy protection for student loans than it is in the case of a mortgage. The big picture is that this bubble continues to grow without the normal legal means for consumers to let some of the air out. It seems like the availability of bankruptcy protection for student loan borrowers would be a way to bail out consumers. But if the bubble keeps growing, isn’t it Wall Street that’s going to end up in dire need of financial help, to the trickledown detriment of the general public?
As you can see, today is more about questions than answers. One of the best ways to build trust as a leader is to exercise transparency. It’s unfortunate that politics and capital gains are at loggerheads with this principle because it makes trust pretty much impossible. However, the overarching machinations of our society aside, it’s sometimes easy to know an ally when you see one. The nuances of dealing with student debt management are as complicated as the policies that have accompanied student loans since their inception. Fortunately for borrowers, there are student aid organizations with the expertise to optimize your student debt.