Seven in ten students graduate with student loan debt, which is now bigger than both auto loans and credit cards. In fact, student loan debt is second only to mortgages now. Student loan debt is the most collectible kind of debt there is. Student loans are nondischargeable in bankruptcy, and your wages can be garnished and your tax refunds intercepted, with or without lawsuit. I believe it is time to bring back the bankruptcy discharge for student loan debt.
Student loans are the only type of risk-free lending in the United States
More than 90% of student debt is subsidized by the federal government. In recent years, states have slashed funding for higher education, forcing students to take out larger loans. Yesterday Gov. Scott Walker (R-Wis.) proposed a $300M cut to the University of Wisconsin system over the next two years.
For-profit schools account for nearly a third of all student loans despite having just 13% of all students. And their collection efforts (see the video above) are invidious. Right now Massachusetts is pressuring the U.S. Department of Education to forgive hundreds of student loans originated at Corinthian Colleges Inc., a for-profit educator investigated by state and federal authorities for practices that left many students deeply in debt, but without jobs.
Bring back the bankruptcy discharge for student loans
Prior to 1976, student loans were dischargeable in bankruptcy just like any other kind of consumer debt. With the introduction of the U.S. Bankruptcy Code (11 USC 101 et seq) in 1978, the ability to discharge education loans was limited. 11 USC 523(a)(8) provides for the dischargeability of education loans in bankruptcy. According to 2013 report by the Center for American Progress, it is time to bring bankruptcy back for student loans: “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…Bankruptcy protection,” continues the report, “encourages a healthy level of risk taking and boldness by letting citizens know that their mistakes may not permanently cripple them financially.”