Discharging Student Loans in Bankruptcy IS Possible – But Should It Be So Hard?

It’s no secret that I’m a huge proponent of higher education, even if that means taking on debt. I, in fact, took on a fair amount of debt to attend graduate school – almost $25,000 just in principle. Thankfully, I’ve paid off over half of my student loans and plan to have them paid in-full in about 18 months. My situation seems to be unique, though, as millions of Americans my age are struggling to make their student loan payments.

Whenever the student loan “bubble” is discussed among politicians or in the media, the question of whether or not it should be possible to discharge student loans in bankruptcy invariably comes up. Currently, it is possible to discharge student loans in bankruptcy – it’s just very, very difficult. Take a look at the infographic below for some scary stats about student loan debt and just how few bankruptcy filers are able to have their student loans included in their discharged debts:

Can Claiming Bankruptcy Discharge Student Loan Debt?
From: OnlineColleges.net

I understand the basic point behind making it really difficult to include student loans in a bankruptcy – since a bankruptcy takes seven years to fall off of a credit report, the concern is that people will graduate from college at 22 or 23 with massive student loans, file bankruptcy, then just wait until their thirties to try to buy a house or a new car. In other words, student loan providers (mostly the federal government) would end up having to write off millions of dollars in bad debt while the students got an education for “free” (although the consequences of bankruptcy certainly aren’t what I would call “free”).

But recent college graduates today are faced with some unique challenges: many had to borrow a lot for college because the the cost of higher education is rapidly outpacing inflation, coupled with the fact that the economy continues to improve very slowly, which makes finding a job difficult. I hate to sound so negative, but this double-whamy will set many Millenials back significantly, which has implications beyond just our own personal comfort and ability to build wealth. Many of my peers are unable to buy homes, unable to spend money on major consumer products (like cars), and are unable to engage in smaller, more regular forms of consumer spending, like going to restaurants, bars, going shopping for clothes, etc…all because they’re making ridiculously high student loan payments every month. This is a drag on the overall economy, which could definitely use the boost that additional discretionary spending would bring.

So do you think it should be easier to discharge student loans in bankruptcy? Explain!


Discharging Student Loans in Bankruptcy IS Possible – But Should It Be So Hard? — 55 Comments

  1. No I don’t. Let’s face it. We all know what we can afford before we choose a college. If you can afford a state school but choose a private school then you are responsible. You mention that some of your friends can’t afford to go out. Well when I first got out I couldn’t either and I had no loans. I made a horrible salary. I’m really concerned about all these loans that aren’t being paid back. I’m sure one reason tuition hikes up are due to unpaid loans thus causing those behind them to pay more. It is a never ending cycle. Society needs to be held responsible for the debt they incur.

    • No, at 17 years old, you probably dont understand Amortization. I didnt, and I was in Calc 2, and had taken physics and programming already.

      I’m sick of the ignorant idea that “Society needs to be held responsible for the debt they incur.” People would GLADLY pay back their student loans, if they could afford them.

      For instance, my Sallie Mae wants me to pay 1200 a month. I can only afford to pay off the interest every month, which is 600. They will not consolidate, they will not negotiate, I have NO options. So tell me why the VFX studio that made “Life of Pi” can, and DID, go bankrupt for millions of dollars, and not pay its employees… but I cant???

      Please, enlighten me.

  2. You should read this piece from the NYT this summer – http://www.nytimes.com/2012/09/01/business/shedding-student-loans-in-bankruptcy-is-an-uphill-battle.html?pagewanted=all

    The problem is not that it is too hard, it is that the rulings are too inconsistent and the same case can get a different ruling depending on the judge.

    I have no problem with discharging the loans being difficult to discharge, otherwise it would be subject to abuse, but I think the bigger concern is that there does not seem to be a uniform standard as to what constitutes sufficient hardship for discharge.

  3. I completely agree with Lee Ann. People DO need to be held responsible for the debt they incur(ANY debt, except, in my opinion, medical debt – whole other topic). If a student can’t afford their student loans then they shouldn’t take them out. Period. I do completely agree with you that because of these high debt loads, these people are not contributing to the menial spending required by to keep our current economy running (again, whole other topic). However, they shouldn’t have been allowed to take out these loans in the first place. And, I do agree that our society needs more education – it’s ridiculous how stupid so many Americans are. I do believe something needs to be done in this country regarding the price (and quality) of education, but I do not believe allowing people to discharge their educational loans is the answer. (I have my BS and MS – zero loans. No help from parents. All academically based scholarships, internships & on-campus jobs – and I worked my ass off for those grades & positions. It can be done)

  4. I’m not really sure how I feel about it. I believe that I am someone who legitimately should have been able to include my student loans in my bankruptcy. I’d be so much better off without that burden, and quite honestly, I don’t anticipate being able to really pay them anytime soon. It would just be a relief to not have them hanging over me so I could move forward. But there is a potential that people could abuse the ability, people who deliberately went to expensive schools to just take out hundreds of thousands in loans and never pay them back. Some people could really benefit, others would just be looking for a free ride. So it’s hard to say. I will say that I really wish I could have included my student loans in my bankruptcy. Things would be looking a lot brighter now if I could have. : /

  5. I think that it should be harder to discharge student loans in bankruptsy. People (and the government) need to start taking responsibility for their own actions and pay debts that they incurred. If they do get the loans discharged I think the degree should go with it (they should never be able to use it). Like JP said, medical bills are a whole other issue.

    • I see. So because someone struggles financially and needs debt relief, all of the papers they wrote, all the tests they took, all their hard work, should just be taken away from them? They should lose their education so that they’ll continue to struggle with money?

      I sure am glad you don’t make the rules. The suggestion that people should have their degrees taken away is utterly absurd.

      • It is not utterly absurd. A person attends college at a cost (student loans) to obtain knowledge knowing that the cost will have to be paid back. Taxpayers shouldn’t have to foot the bill for it. People need to learn what sacrifice is. Expecting something for free because they are too lazy to actually work for it is utterly absurd and will be the downfall of our country.

        • I see what you’re both saying. The reason that people propose revoking college degrees from those who seek to discharge student loans in bankruptcy is because that’s what usually happens when you don’t pay your bills. If you fail to make your car payments, your car gets repossessed. If you don’t make mortgage payments, you go into foreclosure. So the idea is, if you’re wiping out the debt, you should have to give up the degree.

          The problem is…that’s not how it works. You can’t take knowledge out of someone’s head, even if you do take the degree away. I don’t have an answer to this problem, I’m just trying to explain that it’s a complicated issue :-/

          • “Stan” is wrong. By his logic, if someone has medical bills forgiven, then someone should come and take that person’s health away.

            A worldview and mentality like that of “Stan” is the downfall of this country. I wish he had a Tea Party to go to so he was too busy to come here and say such ignorant things.

            That’s part of why he’s not welcome on my blog anymore. *shrugs* I just got sick of it.

          • But the thing is that if you take people’s degrees away they’re going to get into the financial mess that got them into debt. They won’t be able to compete against a more educated workforce and they won’t have any chance.

            Not everyone chooses to go into debt because they got an education. I’ve read horror stories of people who signed things not knowing what they were and ending up $200k in the hole. People whose parents took out student loans in their name. People who had to take out large student loans just to afford the tuition at overpriced schools that were supposed to make a difference.

            It’s not as simple as “give back the degree.” Making people give up their degrees doesn’t solve anything and it’s very shortsighted.

            Ideally nobody would have to declare bankruptcy on a student loan. But the world isn’t perfect.

          • You missed the part where I said “medical bills are a whole other issue.” Way to take things out of context again C. You’re good at that. You say I’m Tea Party, but yet I am pro-choice, believe that same sex marriage is ok and am actually part of a union. Those 3 things alone belong to the democratic party. (although I’m not a democrat nor am I republican) If you remember right, which I’m sure you don’t, you were banned from my blog because of the things YOU said, not the other way around. I am perfectly fine not being welcome on your blog. I will not get into a war here with you (although you say you have theoretically “changed” your ways) because this is not what TeacHer wanted and I will respect that.

            My thoughts come down to this. If you recieve something knowing that you have to pay for it, then you should pay for it. There is no other option to me. We have differing opinions and that is fine.

    • I graduated in 1990. I have been on disability since 1999. If I could give back my degree and be out from under the debt, I’d do it in a hot second. Believe me, When I was 18 and choosing a college, the thought that I would be disabled and saddled with crippling debt didn’t even seem like a dystopian fantasy. It wasn’t even within the realm of thought.

  6. I don’t think that student loans should be able to be forgiven in bankruptcy at all – period! (unless it’s due to a medical issue) So what if you can’t buy a car or a house as quickly? Or if you can’t go out to eat as much or buy so many clothes? GROW UP! Take responsibility! Live within your means and pay for what you’ve been given. Quit whining.

    • I understand what you’re saying, but I think you missed the point I was making. I’m not talking about personal comfort here – consumer spending, large and small, is the cornerstone of our economy. If peoples’ ability to spend their discretionary income is being sucked up by enormous loan payments, that’s bad for the overall economy, not just the individual.

    • My disability benefit is $847. I receive $750 after the Department of Education takes their cut-which, as far as I can tell, doesn’t even get applied to penalties, just keeps me in an active file somewhere. Out of that $750 I have to pay rent, utilities, groceries, household supplies, gas and auto insurance, and everything else in life that costs money. I live in a small rural town, so my cost of living is pretty low. Mostly I make do and cry a lot. But at least I’m not “whining.”

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