Should Student Loan Debts be More Easily Discharged in Bankruptcy?

May 9, 2012

By: John Clark

The federal government should amend U.S. bankruptcy law to allow students to more easily eliminate their student loan debt in bankruptcy court, according to an argument in the latest U.S. News & World Report made by a former policy adviser with the Department of Education.

In the opinion of Amy Laitinen, who currently serves as a senior policy analyst at Education Sector, high levels of student loan debt are threatening to disrupt the economic recovery, and the Obama Administration should tweak bankruptcy laws to allow an easier path for student loan relief.

Under current bankruptcy laws, consumers may discharge student loans in bankruptcy only if they meet certain limited eligibility requirements that show they would suffer an undue hardship if they were forced to repay their loans.

Granted, some filers still choose to seek bankruptcy protection in order to shed other debts, thereby freeing funds to repay student loans, but this option has its limits.

The student loan crisis has prompted serious attention from both the Obama administration and Congress, who are working together to craft some kind of solution for the problem.

However, according to Laitinen, a current proposal that has the government spending $6 billion to keep the interest rate for federally subsidized Stafford loans at 3.4 percent for an extra year is both costly and inefficient.

In Laitinen’s opinion, this “solution” does not solve the problem of high interest rates associated with private student loans, which are usually much more expensive than loans that are subsidized by the government.

According to Laitinen, instead of patching the problem with short-term solutions, the government should amend bankruptcy laws so that students could discharge private student loan debt in bankruptcy court.

In her view, this solution would not sink private lenders. On the contrary, it would force private lenders to be more selective in their loan-making decisions, while offering a lifeline for students who are already susceptible to predatory lenders.

In response, some critics might argue that such actions would limit many potential students’ access to education loans, but this gap could theoretically be filled by an increase in government assistance.

This debate will likely rage for years, but both sides can agree on one thing: after passing the $1 trillion mark earlier this year, student loan debt became a massive problem, and one that urgently needs to be addressed.