The U.S. student loan debt is characterized as a debt crisis in this country. Currently, about 45 million Americans hold more than $1.7 trillion in student loan debt. Of that, about 92% is backed by the American taxpayers. Cumulative student loan debt is the second largest category of consumer debt after mortgages, which struck me as being pretty crazy.

While tuition is what we normally think of with student loan debt, there’s also the cost of other things that students need, such as housing, food, books, and supplies, and all of those things go up in price every year, which contributes to the problem.

It’s not a simple issue, but there is some movement to try to fix some of the problem. Because it’s impossible for people to escape student loan debt in most cases, the lenders that offer the student loans have little motivation to assess the creditworthiness of the people that they lend to. In other words, the lenders don’t need to underwrite these loans as they would if they were assessing someone for a mortgage, for example, where they would look at how much they are putting down, the value of the property, and their credit worthiness. For student loans, the folks who are seeking them out will owe the lenders forever, in most cases, due to the current state of the laws. Therefore, the lenders are just making these loans without properly accounting for the risk involved because they know that they are going to get paid, and if they are paid over a longer period of time, they can charge fees and interest.

I’ll explore this further later, but there really aren’t any great options for getting out of student loan debt currently in this country. A lot of people argue that the increased availability of student loans has also enabled the institutions themselves (colleges and universities) to increase their rates for tuition. All of this is feeding into the problem, the student loan debt crisis.

Has Student Loan Debt Ever Been Dischargeable in a Bankruptcy?

Until 1976, student loans could be discharged in bankruptcy proceedings. Then, there was a big push to change that, with the thinking that it was unfounded for people, particularly professionals, to go to school, rack up a bunch of debt, file bankruptcy, and get rid of that debt. Studies actually determined that out of all the loans that were in default at that time, only something like one percent of them were in bankruptcy. Out of all the people who were behind on their payments on student loans back in 1976, only a very small percentage of them were actually filing bankruptcy. That’s not even to say that they were filing bankruptcy because of the student loan debt.

So, it’s questionable as to whether people really were taking advantage of bankruptcy. Nevertheless, because of those concerns, changes were made. The first restriction was under something called the Higher Education Act, which made it so that student loans couldn’t be discharged until five years after the commencement of the repayment period under the loan. Basically, whenever your payment started on the loan, you’d have to wait five years from that time before you could file bankruptcy to potentially get rid of that. This was just the first restriction. Over time, other laws were passed that further tightened the restrictions, and subsequent amendments to the Bankruptcy Code expanded the restrictions to include private loans that were backed by nonprofit institutions, in addition to the government loans and federal loans, which originally were the ones that were dischargeable. They also extended that five-year period to seven years.

As time went on, later amendments eliminated the seven-year period and left only one way to get rid of either federal student loans or private, nonprofit student loans in bankruptcy, which was a concept called undue hardship. Then, under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCEPA), they expanded the definition of what student loans couldn’t be discharged to include all private student loans, essentially. They no longer needed to be associated with a nonprofit.

So, at this point in time, the law basically provides for one way to get rid of most student loans in bankruptcy, which is if you can prove something called an undue hardship. We have to show the court that we’ve met certain factors in order for the court to discharge all or part of the student loan under the undue hardship. It’s a very difficult thing to prove, and there aren’t a lot of cases where folks were able to do so. More recently, I think, some of the judges have been more liberal in applying the undue hardship standard. I’ve heard of some cases where it may have been a little bit easier for some borrowers to get either a full discharge or a partial discharge of their student loans, but it’s not really uniform. In other words, some judges may give people a break while other ones would not, and it really just depends where you are and what the particular situation is.

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