Student Loan Forgiveness in Bankruptcy: The Debate

In the world of bankruptcy law, there is one debate that is currently at the forefront: should debtors be allowed to discharge student loans through bankruptcy? In general, student loans are debts that are not forgiven in bankruptcy. There are a few exceptions, but they are difficult for debtors to succeed under. However, there has been some push for amending the existing bankruptcy laws to make it easier for debtors to be able to discharge student loans through bankruptcy. The main argument being why should student loans receive preferential treatment over other unsecured debts in a bankruptcy.

Student loans can either be borrowed privately or from the federal government. Many leading experts and attorneys in the bankruptcy field agree that private student loans should be dischargeable through bankruptcy, much like it was prior to 2005, because the lender is the only party negatively affected. In fact, The Fairness for Struggling Students Act was recently introduced to Congress that would reverse the 2005 changes and would allow private student loans to be discharged the same as other unsecured debts. However, private student loans only make up about 10% of all student loan debt with the other 90% being owed to the federal government.

Those advocating for federal student loan forgiveness argue that it would actually help the economy. They reason that the debtors would become more active consumers and stimulate the economy with the money that they would be spending on student loan repayments. Advocates also argue that student loans are also keeping debtors from making major life decisions, such as buying a house or starting a family. Overall, the argument is that student loans are keeping debtors from spending money in other areas, which is actually doing more harm than good.

On the other hand, the concern with discharging federally issued student loans is that the taxpayers and/or future borrowers will be called upon to subsidize these discharged loans. Why should taxpayers or future borrowers have to suffer because people can’t pay student loans that they chose to borrow? In order to avoid the negative effects that discharging student loans could potentially have on taxpayers or future borrowers, many experts have offered alternative measures to forgiveness through bankruptcy. One of these alternatives is to impose borrowing limits on student loans, much like the limits on home mortgages, credit cards, and small business loans. This would limit the amount of debt that students can incur during their tenure as a student.

Others who are opposed to federal student loan forgiveness argue that there are already safety valves in place and there is no need to use bankruptcy as an out. One such safety valve is the Public Service Loan Forgiveness Program. This program allows for unlimited federal loan forgiveness after ten years of income-based payments for those individuals who go into public service, such as government and non-profit jobs. Another safety valve is that student loans can be discharged if they impose an undue hardship on the debtor; however, this is very difficult to overcome and very rarely do debtors succeed under this exception.

So, the debate continues on with no foreseeable changes to the current bankruptcy laws in sight. It seems unlikely that the federal government will pass any laws that will take money out of their own pocket. No matter what side of the fence you fall on, the one thing that is apparent is that this country’s ballooning student loan debt is a major problem. It is currently in the trillions of dollars and, eventually, something is going to have to give.