Student loan debt is on the rise and has increased exponentially over the past ten years. The total outstanding student loan debt now exceeds $1 trillion and continues to rise.
In addition, college tuition continues to increase so the problem will continue to compound.
The Federal Government has been relatively stagnant on this issue offering little support or hope for a solution. On the other hand, local governments and enterprising entrepreneurs are looking for creative ways to remedy the issue.
So, if you are struggling with student loan debt and have made your best efforts to pay back your loans, can’t you seek bankruptcy protection to resolve your student loan debt? The short answer is “probably not.”
While credit cards, personal loans, medical debt, car loans, mortgage loans and even certain tax debt is dischargeable in bankruptcy, student loan debt usually is not.
As stated, student loan debt is generally not dischargeable in bankruptcy unless you can prove “undue hardship.”
Since the late 90’s this “undue hardship” standard applies to both Federal and private student loans. Of course, “undue hardship” is not defined anywhere in the bankruptcy law so courts rely on the “Brunner Test” to determine dischargeability. The Brunner Test is a three part test born from a U.S. Court of Appeals decision (Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 [2d Cir. 1987]) and requires the debtor to prove:
- That the debtor cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to pay off student loans;
- that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
- that the debtor has made good faith efforts to repay the loans.
The Brunner Test is extremely difficult to satisfy and therefore, most student loan debt is not dischargeable in bankruptcy.
A Brief History
Why is student loan debt treated differently than other unsecured debt (credit cards, personal loans, medical debt, etc.)? I often find myself pondering this question coming up with unreasonable answers.
It was not always this way.
Prior to 1976, all educational debt was dischargeable in bankruptcy. In 1976, the first changes came through the pipeline. That year, the bankruptcy law was changed making government loans non-dischargeable during the first five years of repayment.
This non-dischargeability amendment came into being to supposedly prevent abusive professionals (doctors, lawyers, etc.) from incurring excessive student loan debt and then wiping it out in bankruptcy prior to embarking on their careers.
The law toughened again in 1990 extending the 5 year threshold to 7 years. In 1998, student loan debt became non-dischargeable in bankruptcy except in cases of undue hardship.
Under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), the student loan exception to discharge expanded to cover almost any debt incurred as an education expense.
A true explanation for why these restrictions have toughened is a political discussion not suitable for this blog, so there really is no answer to the original question.
Turning Back the Clock
Allowing certain student loans to be dischargeable in bankruptcy could have a positive impact. Returning to the 1990 dischargeability standard seems reasonable and fair.
Right now, student loan borrowers are at the complete mercy of the lenders. They have no recourse.
Introducing bankruptcy back into the equation could give consumers some much needed leverage and more importantly, relief.
Image courtesy of Eleaf (Flickr).