Unlike most financial obligations, it’s very difficult for Americans to discharge student loans when they file for bankruptcy. There are several reasons for this. One of them is that such loans are generally issued without regard to student or family collateral or their ability to pay back the loans.
The other reason is extensive lobbying by the banking industry, which over time worked to make more and more student loans immune from bankruptcy protections.
It’s time to change that, according to a new report issued by the Center for American Progress.
Congress should move to make some student loans dischargeable in bankruptcy. Given the persistent myth of the young borrower declaring bankruptcy at the start of his or her career, it is understandable that no one wants to be seen as opening the floodgates to potential abuse. The way to approach this issue, however, is to establish clear and public standards for what we at the Center for American Progress refer to as Qualified Student Loans, or loans that cannot be easily discharged in bankruptcy, which has been done for other types of financial products as a way to identify safer financial products. Qualified Student Loans would include loans, both federal and private, that have reasonable repayment conditions such as low interest rates and access to favorable forbearance, deferment, and income-based repayment options. These loans would also be qualified based on the successful track records of the institutions and programs receiving the proceeds as a way to ensure that these are programs that—by virtue of their graduate employment rates—give graduates a reasonable chance to repay. Loans not meeting both standards—borrower-friendly terms and some evidence that graduates, based on their employability, are likely going to be able to repay these loans—would be eligible for discharge in bankruptcy just as credit cards are. Other loans—Qualified Student Loans—would maintain the undue-hardship provision while at the same time benefiting from greater borrower protections.
The Qualified Student Loan system would recognize that there are good and bad student loans. There are some we should encourage students to use and some we should actively try to prevent.
The QSL would, in theory, reform the system by making the bad loans relatively easy to discharge in bankruptcy and retain the existing protections for “good loans,” those with appropriate repayment options that are affordable for students.
This probably wouldn’t have a notably meaningful impact on the scope of the debt itself (the problem with college debt is the fact that it constitutes some $1 trillion and greatly reduces the options college graduates have in terms of careers and life decisions; most college graduates never file for bankruptcy) but it’s damn time to do something about an industry that’s getting rich screwing over a generation.
Before 1976 student loans were like any other debt with regard to bankruptcy. Today if people are disabled, retired, or indigent for other reasons, the federal government still makes you pay, garnishing wages, assets, and even social security benefits to cover student loans due.