Recently, Sen Richard Durbin of Illinois stated at a hearing on the issue that it was time to reverse a 2005 amendment to the Bankruptcy Code that made it impossible to discharge student loans taken out under government programs or qualified under such programs. http://www.bloomberg.com/news/print/2012-03-20/durbin-urges-private-student-loans-be-discharged-in-bankruptcy.html. We quite agree. Student loans have become another “easy money” disaster in the making, much like the easy mortgage loans that go so many people in trouble and have now generated a long-term housing crisis.
Before 1998, student loans could be discharged after 7 years. Now, the only way such loans can be discharged is by showing special hardship. That showing is very difficult to make, and generally requires that the borrower have no present income, and no prospect of any income any time in the future.
We see plenty of people who are saddled with student loans that are 3-10 times their total annual income. Most have no extra money in which to make any payment, without foregoing basic necessaries like food, transportation, or basic medical care.
Many student loan lenders, unlike mortgage lenders, seem to be far more willing to adjust payment terms to meet the borrower’s financial realities. (They can afford to wait, knowing there is no escape and the interest keeps accruing. The result can be perpetual debt. To be fair, if the bankruptcy law changes, lenders may end up being more aggressive and the cost of student loans could go up. But we think that freely lending to people without regard to their ability to repay and without some avenue for repayment or relief is not in our society’s best interest.
We hope the change comes about. One alternative is to make such loans dischargeable in Chapter 13 through a repayment plan, or to setting easier standards for a court to find them dischargeable. However, even if changes in the law do not come (and the lenders have a powerful lobby), many people can discharge other debts or make other arrangements through bankruptcy that can contribute to solving the student loan problem. This needs a careful and individualized review by a qualified attorney.