Although most types of debt are dischargeable in bankruptcy, there is one notable and growingly troublesome exception: student loan debt. Student loan debt has become one of the top forms of personal debt in the U.S. and is causing a great deal of financial hardship to millions of Americans, yet there is no way to discharge these debts in bankruptcy. As Dallas bankruptcy lawyers, we explains why the law exists, and why it may need to be changed.
History of Student Loan Debt and Bankruptcy
Prior to 1976, says the bankruptcy lawyer, student loan debt was like any other type of debt, and fully dischargeable in bankruptcy. In 1976 Congress enacted a law making student loan debt dischargeable only after five years of repayment, and in subsequent years enacted laws making it increasingly difficult to discharge. The initial fear was that recent grads would immediately declare bankruptcy to wipe out their student loan debt, while doing relatively little harm to them in the long run, as they had no financial history to speak of. This fear was ungrounded, but took root, and the results are being felt today.
Federal student loans are protected by the federal government and offer many repayment options for those experiencing hardship, so most proponents of changing the law focus on private student loans. Private student loans carry higher interest rates and have stricter repayment terms than federally backed loans. In fact, these loans are essentially the same as personal private loans, and therefore many argue that they should be treated as unsecured debts in bankruptcy, just like those private loans. Whether the laws will be changed remains to be seen.