Student Loans: The Only Type of Risk-Free Lending

National Association of Consumer Bankruptcy Attorneys

Student Loans: The Only Type of Risk-Free Lending

Brian V. Lee

February 27, 2018

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The only type of risk-free lending in the United States is student lending. Student loans cannot be discharged in bankruptcy and can even survive your death. No other type of lender in America is afforded the same protections as student loan lenders.

Student loans are not dischargeable in bankruptcy

Lots of different types of debts are not dischargeable in bankruptcy. You cannot discharge domestic support obligations — child support, property division, or alimony. Likewise, you cannot discharge fines, forfeitures, and criminal restitution obligations; debts arising from fraud or theft; or certain debts that you fail to schedule in your bankruptcy. But of course none of these types of debts are loans.

Most tax debts cannot be discharged in Chapter 7, but some can. Again, however, tax debts are not loans.

Student loans are unique in that public and private lenders are completely protected from the bankruptcy discharge. In the U.S. the only type of risk-free lending is student loans.

All lenders face risk — except student loan lenders

Unsecured creditors, including credit card issuers and personal loan lenders, invariably face the risk of default. Hospitals and clinics face the risk of nonpayment when they treat a patient without payment up-front. The debt collection process is expensive. Creditors often charge off debts that they deem too difficult to collect. Unsecured creditors face immense risk that their loans will be discharged in bankruptcy, or that they simply will never be able to collect.

Secured creditors like auto lenders and mortgage companies face lesser risk, but they face risk nonetheless. Most secured debt is, in fact, undersecured. That is, the collateral is more valuable to the borrower than it is to the creditor. Few creditors would choose to repossess, seize, or foreclosure rather than be paid per the terms of the security agreement. Even if the secured creditor does liquidate the property, the odds of recovering its loan in full are, in most cases, very low.

Student loans do not face such risk. If you take out a student loan, you will owe that loan until you pay it off or until you die. And even if you die, your student loan may still need to be paid from your estate. While federal student loans are cancelled upon the death of the borrower, private student loans are not.

Bring back the bankruptcy discharge for student loans

Betsy DeVos, Secretary of the Department of Education, is sending mixed messages. On the one hand, there are indications that Education is considering clarifying the meaning of undue hardship for the discharge of student loans. That is welcome news. Lee Legal has long advocated for the return of the student loan bankruptcy discharge. On the other hand, however, the DOE is arguing that the nation’s student loan servicers should be protected from state rules that may be far tougher than federal law.

No for-profit institution should be able to engage in risk-free lending. And the federal government shouldn’t make a profit by lending to student taxpayers. Student lenders should face the same risk of lending as all other creditors.