Student Loan Scandal and its Silver Lining

Too many people still think that if student loans have been due and payable for at least 7 years, then they are freely dischargeable in a Bankruptcy. This used to be the law — 10 years ago or so. For the recent past most student loans have been not dischargeable (regardless of age) absent a showing of undue hardship — which is an incredibly high standard. There was a limited exception for completely private student loans.

Two years ago student loans took another slip down the non-dischargeable hill. In the 2005 amendments to the Bankruptcy Code, Congress made all student loans, federally insured and otherwise, non-dischargeable, 11 U.S.C. Section 523(a)(8), absent a showing of undue hardship.

Now, we have student loan scandals making headlines around the country, and Senator Biden has responded by filing S. 1561. I haven’t gotten my hands on a copy of the full text yet, but I understand that it limits the bankruptcy dischargeability provisions to loans, “made, insured or guaranteed” by a governmental unit. This would allow the discharge of all private student loans without a showing of undue hardship.

Frankly, there are some significant problems with what I have read. First of all, there is a rumor floating around that it would make loans made directly by state-supported Universities non-dischargeable, but not loans made by private Universities. Second, a complete repeal of the non-dischargeability protections could have the unintended effect of driving interest rates through the roof on private loans.

Whether this bill is perfect or not isn’t really the issue. This is an area that has needed Congressional attention for a while. About a year ago the U.S. Supreme Court ruled that Social Security retirement benefits could be garnished to pay student loan debts, and the undue hardship standard for Bankruptcy basically means that if you can afford to pay a lawyer to bring the adversary proceeding necessary to determine non-dischargeability — then, you lose.

It is a shame that it takes a good scandal to get Congress’ attention, but at least that still works.


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