Why Student Loans Should Not Be Dischargeable in Bankruptcy

September 26, 2022 9:26am

There was a time when student loan debt could be discharged in bankruptcy. But that changed in 2005 when Congress overhauled America's bankruptcy laws via the Bankruptcy Abuse Prevention and Consumer Protection Act.

It was a bipartisan bill that President George W. Bush signed into law. Do you know which Democrat Senator supported it most? I'll give you a hint. He was a senator from Delaware. Yep! That's right. Senator Joe Biden was one of the most vocal supporters of no longer allowing student loan debt to be discharged in bankruptcy. Why was that? Was it because he genuinely thought people should pay back their student loans? Doubtful. It was probably because Delaware is the corporate home for some of America's largest banks, and the banking industry gave him millions in campaign donations.

In the preceding ten years, from 1995 to 2005, the amount of outstanding student loan debt borrowed from private financial institutions nearly tripled from $56 billion to $150 billion. It made student loan debt rank second only to home mortgages in terms of total money owed. And passage of that Act triggered an explosion in the amount of student loans made private lenders. Why? Because those lenders, with student loans no longer being dischargeable in bankruptcy, were far more likely to get repaid. So they started loaning money to pretty much any student who would sign on the dotted line. And that easy money then triggered a massive surge in tuition, room, and board at America's colleges and universities. And why wouldn’t it? Just as easy money for sub-prime mortgages triggered a massive spike in real estate prices that ultimately crashed and caused the housing crisis and great recession of 2008, easy money for college triggered a massive spike is college costs. But widespread college loan defaults didn't materialize because student loans could no longer be discharged by declaring bankruptcy.

Student loan debt should absolutely NOT be dischargeable in bankruptcy. If student debt could be discharged via bankruptcy, most students would take out as much debt as possible, live in luxury while in college, and then declare bankruptcy upon graduation. Sure, their credit scores would be lousy for seven years. But it would likely be far more financially rewarding than paying off the debts they incurred.

Colleges would also massively increase tuition, room, board, etc. And with no way to "repossess" an education, the taxpayers would be screwed even more than they're currently getting screwed.

Despite bi-partisan attempts to make student loan debt dischargeable in bankruptcy, it would be disastrous policy.