Should Student Loan Debt Be Easier to Discharge in Bankruptcy? – Top 3 Pros & Cons
Americans owe more than $1.64 trillion in student loan debt, and the average 2019 graduate owes $29,900. [1] For the nearly eight million borrowers currently in default—meaning they have not made a payment for at least 270 days—declaring bankruptcy and starting over may seem like an appealing option. [3] Credit card debt, medical bills, auto loans, and even gambling debt can be canceled by declaring bankruptcy, but thanks to a 1976 law, discharging student loan debt is much more difficult. [10] [4]
Educational debt was dischargeable before 1976, when Congress altered the bankruptcy code out of concern that people wouldn’t pay back federal student loans. [4] Later, private student loans were also protected from discharge in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. [5] According to the US Department of Education, people who declare Chapter 7 or Chapter 13 bankruptcy can have student loan debt canceled, but only if a court finds there is evidence of “undue hardship.” [6] Getting student loans discharged is notoriously so rare that many lawyers advise clients not to try: less than 0.5% of student loan holders end up clearing their debts in bankruptcy. [7]
Should Student Loan Debt Be Easier to Discharge in Bankruptcy?
Pro 1
Denying student loan debtors the benefits of bankruptcy is unfair.
The US Supreme Court said in 1915 that the benefits of bankruptcy allow debtors to “start afresh free from the obligations and responsibilities.” [8] Famous business leaders from Henry Ford to President Donald Trump have used bankruptcy for a fresh start. [9]
Car loans, credit card charges, medical bills, and even gambling debts can be discharged in bankruptcy; not allowing educational debt to be discharged is unfair. [10] Mark Huelsman, EdM, Senior Policy Analyst at Demos, wrote, “[I]n a world where most students must borrow for a credential, borrowers should receive the same failsafe protections on these loans as they do on any other consumer loan.” [11]
Students who didn’t understand the consequences of taking out big loans at age 18 or who were misled about future job prospects can be saddled with six-figure debt for decades. [17] [20]
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Pro 2
Student loan discharge would fix a system that disproportionately hurts minority students.
If student loan debt were reduced for households making $50,000 a year or less, the wealth gap between black and white households would decrease by nearly 37%, and by over 50% among those making under $25,000, according to a study by the Institute of Assets & Social Policy at Brandeis University and Demos. [18] While black students graduate with more debt than white students, the disparity only grows and they owe double what their white counterparts owe within four years. [32]
Discrimination in hiring and wages puts black borrowers at an even bigger disadvantage as compared to their white classmates. [33] “Sending African American students into an inequitable adulthood with large debts from college can put them even further behind than they already start,” said Ben Miller, Senior Director for Postsecondary Education at Center for American Progress. [19]
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Pro 3
Student loan discharge would encourage entrepreneurship and boost the economy.
Student loan borrowers delay retirement savings, car purchases, home purchases, starting a business, and even marriage due to their financial burdens. A survey by American Student Assistance found that 35% of respondents “found it difficult to buy daily necessities because of their student loans” and 61% said their student loan debt impacted their ability to start a small business. [24] 55.7% of millennial renters said they could not buy a home because of their student loan debt. [25]
Senator Elizabeth Warren (D-MA) said, “The enormous student debt burden weighing down our economy isn’t the result of laziness or irresponsibility. It’s the result of a government that has consistently put the interests of the wealthy and well-connected over the interests of working families.” [26]
Student loan debtors aren’t just recent college grads; the number of people over the age of 60 who are saddled with educational debt has quadrupled since 2005. [36] People of all ages could become economically productive again if they were able to discharge student loans in bankruptcy and start fresh. [34]
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Con 1
Student loan discharge would allow borrowers to abuse the loan system.
Making it easier to discharge loans would give people an incentive to take out loans with no intention of paying them back, or to borrow more than they need. [12] 30% of college students polled by LendEDU said they used student loan money to pay for spring break trips. [13] Allowing students to discharge educational debt could cause them to seek bankruptcy without fully realizing the negative long-term consequences on their credit scores and other aspects of their lives. [14]
One study found that reinstating bankruptcy protection would increase loan defaults by 18%. [15] A Heritage Foundation study said, “Students who borrow money for college shouldn’t be bailed out–bailouts only encourage additional bad behavior by future students.” [16] New college graduates rarely have significant assets to surrender in bankruptcy, so they have less incentive to avoid bankruptcy. [23]
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Con 2
Allowing easier bankruptcy discharge could destroy student loan programs.
Over 40% of American students with federal student loans aren’t making payments and one in six are in default. [31] In the end, the federal government collects only 80 cents on the dollar for defaulted loans, meaning the US taxpayers lose billions of dollars on those federal loans. [21] Making it easier to discharge debt in bankruptcy would increase the default rate and the money the federal government loses on its student loan programs. “These bankruptcies could easily destroy the federal student loan programs,” argued Allen Ertel, former Congressman (D-FL), noting that federal student loan defaults increased 300% from 1972 to 1976, when Congress enacted strict conditions for discharge. [22]
The availability of private student loans increased after the 2005 law introducing nondischargeability for that type of loan; undoing that law could make private loans more expensive and difficult to obtain. [23]
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Con 3
Student loan discharge would incite colleges to raise tuition.
Student debt elimination through bankruptcy would encourage increased borrowing, and more borrowing leads to higher tuition. The National Bureau for Economic Reform cited expansions in borrowing limits as “the single most important factor” in driving up college tuition, responsible for 40% of the increases. [27]
Abigail Hall Blanco, PhD, Assistant Professor of Economics at the University of Tampa, said, “loan forgiveness would be one giant subsidy, creating perverse incentives for both schools and students. If schools knew the government would forgive the cost of their students’ education, they’d face no incentive to cut costs to keep tuition down.” [28] Tuition at for-profit colleges eligible for federal student aid is 78% higher than at colleges ineligible for such programs. [29]
Jason Delisle, former Director of the Federal Education Budget Project at the New America Foundation, said “You’ve essentially got a tool to make your students price-indifferent.” [30] The Federal Reserve Bank of New York found that “a credit expansion will raise tuition paid by all students.” [35]
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1. Is getting rid of student loan debt by declaring bankruptcy different than being able to cancel credit card or gambling debt? Does one situation seem more or less fair to you and why?
2. What other pros and cons can you list for being able to get rid of student loan debt by declaring bankruptcy? Which side do you find more compelling?
3. Should college tuition be reduced or free? What might the impact of lower tuition be on the overall economy?
1. Consider 2021 legislation introduced by Democratic senators to make student loans easier to discharge in bankruptcy.
2. Explore what the US Department of Education says about discharging student loan debt in bankruptcy.
3. Analyze how Abigail R. Hall Blanco’s position that student loan debt should not be forgiven relates to bankruptcy.
4. Push for the position and policies you support by writing US national senators and representatives.
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