Why should student loans be dischargeable in bankruptcy?

August 31, 2020 / Jeffrey Kelly

I believe that it is past time to end the economic slavery of millions of citizens of our country and make student loans dischargeable in bankruptcy just like they were prior to 1998.  Can you imagine the nightmare of living with a $200,000 debt that just hangs over your head and increases with interest every single year?  For many Americans, this nightmare is their daily reality.   

Want to finance a house?  Want to finance a car?  How about getting a loan to start a new business?  When a dark cloud of student loan debt hangs over your head, moving forward economically is impossible.   

Prior to 1976, student loans could be discharged just like any other debt.  Over the years, restrictions were added.  The first restriction was that you had to wait 5 years after graduating before you could discharge student loans. Then, the goal line was changed to 7 years.  In 1998, the hammer was completely put down and student loans could virtually no longer be dischargeable in bankruptcy as a result. For a good summary of the history of student loans and bankruptcy, click here

The Consequences of Making Student Loans Nondischargeable in Bankruptcy 

Since 1998, the cost of a college education has more than doubled in real dollar terms.  When I went to college, the vast majority of college housing was extremely spartan.  Today, most college dorms look similar to a resort so that colleges can attract students, lure them into huge amounts of federally backed debt, and make millions.  Most colleges now have bloated bureaucracies due to the lack of real market forces.  The connection between the true economic value of a college education has been disconnected from the value that said education will produce because of the restriction on dischargeability in bankruptcy.

Many people have been sold on the idea that you cannot have a successful life unless you have a college degree. It is becoming an increasingly popular choice for many young adults to forego college completely because of the high risk that they will never be able to repay the loans.  As a result, someone who should go to college may never develop their full potential because of this artificially inflated price.

Currently, the federal government keeps footing the bill for unpaid student loans.  Colleges get their money from the federal government whether or not a student ever repays the loan.  Where is the incentive to keep costs down and connected to the reality of whether or not the loan will ever be repaid?

The argument for bankruptcy 

Many famous people in the history of the United States have filed bankruptcy and then gone on to do great things for the world.  Henry Ford’s first automobile company did not make it.  Can you imagine a world without Henry Ford?  Thank goodness he was able to file bankruptcy and recover.  What about Walt Disney?  Can you imagine a world with no Disney?  No Mickey Mouse?  No Disney world!  Thank goodness Walt Disney was able to file bankruptcy and recover.

Because of the current nondischargeability of student loans, many college students have never been able to recover their lives.  What a horrible shame!

How many marriages never took place, how many children were never born, how many houses where never built and how many businesses were never started because of the dark cloud of excessive balances on student loans?  Any answer to these questions is pure conjecture but I think it safe to say that if we could estimate it, the answer would be in the millions.  

Nerdwallet reports that 5.2 million student loans are currently in default.

Keeping these loans nondischargeable in bankruptcy does not result in them magically being reimbursed by the students who borrowed. 99 percent of these loans will still never get paid!   

Bankruptcy has made the United States the best country in historyGiving people a second chance makes sense in so many ways. Remember: There but for the grace of God go you. 

Fear of Potential Bankruptcy Abuse 

Bankruptcy is not some magic button people press to make all their debts go away. To file bankruptcy, the debtor must submit documentation under oath to a court of law showing that they are in fact bankrupt.  People who attempt to abuse the system end up in jail.  The lawyers who work for the United States bankruptcy trustees take their jobs super seriously and they will zealously enforce the law. My point is that when someone can afford to pay their student loans, they should continue to pay their student loans even if the loans become dischargeable once again.  

In conclusion, our bankruptcy system should be allowed to determine who should and should not repay their student loans.