Opinion: Student Loans Should NOT Be Discharged in Bankruptcy

Students in financial trouble do deserve a break. But bankruptcy is not the answer

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Recently, my colleague Sheiresa Ngo, multimedia content producer for consumer affairs for Black Enterprise, made a quite reasonable case for her belief that private student loans should be dischargable in bankrutpcy. Her post, Opinion: Student Loans Should Be Discharged in Bankruptcy, generated lots of comments, mostly in support of her proposal, which could become reality if the proposed Private Student Loan Bankruptcy Fairness Act of 2010 becomes law. As a father of a daughter who is struggling to pay back her student loans since graduating from college in 2005, I absolutely understand the challenges many Americans, and Black Americans in particular, face in coping with the burden of student loans.

However, I believe making student loans dischargeable in bankruptcy is not a good idea, and would really backfire on students whose families don’t have the means to front the cost of college tuition and/or who are not able to compete for athletic or academic scholarships or secure enough financial aid to cover education costs. Once you make student loans from banks dischargeable in bankruptcy, they will immediately become unavailable to most students (and probably all students of modest means) or available only under the most onerous terms, including much higher fees and interest rates. In short, it would be even harder to pay the loans back. And it would be costly and difficult, if not impossible, to prevent abuses of such a policy, i.e., people generating student loan debt with no intention of paying it back. In fact, it could take the current student loan crisis and make it immeasurably worse, as people, out of either ignorance or laziness, forgo the challenge of securing scholarships, grants and other preferable forms of aid. They could end up borrowing more money than wise or necessary for college, when the better option would be to go to an in-state school, a public university or a two-year college and then finishing up at a four-year school. “After all,” they’ll mistakenly believe, “if I can’t pay it back, I’ll just file for bankrutptcy protection.”

Actually, the last thing a young person needs on their credit report coming out of college (especially if they are unemployed or underemployed) is a bankruptcy filing–the financial event with the worst possible impact on your credit scores, far worse than the impact of defaulting on a student loan. Remember, everyone from potential employers to apartment renters will look at those credit reports, making it more difficult for a young person to land a job, get affordable car insurance or rent an apartment, as all of these are impacted by your credit worthiness. And many recent college graduates have weak credit histories to start with, as they’re in the early stages of their careers (with incomes to match–if they’re lucky enough to have landed a job) and have shorter credit histories.

It’s important to remember that bankruptcy is far from an easy way out of financial woes. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 made sweeping changes to American

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  • donna

    i dis a agree i have a ton of student loans my husband has been looking for work for a year and a half we can hardly eat we never lived beyond our means so i would love to get ride off all this debt

    • Barbie

      What type of degree did your husband get? Was it something like philosphy or art history or liberal studies? Just curious? What part of the country do you live in? Until he gets the job he wants what’s wrong with a job in retail or just something 2 help out with the finances…just saying

  • The 2005 bankruptcy law is draconian, and so is this opinion. The 2005 law was made with the assumption that the majority of people in bankruptcy are in that situation because they were reckless when in fact, they are in that situation because life happens. More often than not, an event or series of events beyond their control—divorce, job loss, illness (their own or someone else’s), death of a spouse, etc.—happen, and the financial burden of it is more than they can handle, not because almost NO ONE in the country has six months of income stored up for a rainy day, but because these events lead to financial catastrophes that absolutely cannot be managed within the individual’s or couple’s means, including savings. I think you were brilliant, and definitely of the era preceding the “Me Generation,” for committing to freedom from debt before committing to a lifestyle or unaffordable image, but you as you said, you also were a single, child-free, healthy, able-bodied young man who was working, even if the wages were low. If any of that were not true, or if any of the above situations had happened to you, it may have been impossible for you to pay off your student loans. The same would be true of your daughter if any of these situations happened to her.

    When considering who would benefit or be hurt by student loans being discharged in bankruptcy, we also have to consider how and when people are going to college these days. School isn’t just for the young and irresponsible anymore. Going to college immediately after high school is rare, and most students don’t graduate in four years even if they do. Millions of students paying back student loan debt are older students who returned to school after an extended absence. They’re attending for-profit universities, schools for which scholarships and grants sometimes don’t exist, and they’re stuck with the bill. These are people whose lifestyles require them to put the mortgage, the insurance, the car they need to pick up the kids they had before they went back to school, the children, etc. first, before any student loan repayment. When financial catastrophes happen to them, they need all the compassion they can get. And if they’re not going after scholarships anyway, we shouldn’t fear that a more merciful bankruptcy law would make people more lazy about going after scholarships.

    I think your concerns are reasonable, but not necessarily valid. Has bankruptcy ever made credit cards or any type of loan less available to people who haven’t filed for bankruptcy? If not, why do you assume that making student loans dischargeable in bankruptcy would have this effect?

    While I agree that bankruptcy is the last thing anyone should want on his or her credit report—I’ve worked in the loan department of a bank, and I’ve sold cars; it’s disheartening to have someone who hasn’t checked with his bankruptcy attorney try to get money for something he needs—I think that both yours and the other opinion, misrepresent bankruptcy. Many people have the misperception that bankruptcy is a “Get out of jail free” card. The more accurate description is a debt management solution. You are saying to your creditors, “I can’t pay what you’re asking me to pay,” and then your attorney, your creditors’ attorneys, and a judge get together and say, “Based on your income and your debt, I think your creditors are entitled to x amount and that you can pay y amount.” Your balance on all your credit cards goes to zero because the debt from all your creditors is bundled together and you’ve worked out a plan to repay a portion of the debt. Some of your creditors cut their losses, but most get a portion of the money they loaned to you. And if your financial situation changes, you go back to court to recalculate what you owe. You’re not debt-free in bankruptcy. You’re not rewarded for being irresponsible and getting your priorities out of order. And you’re not fully solving the situation if your student loan debt hasn’t been put into the bundle.

    And FYI – I’m not a bitter college grad whose loans are in deferment. I feel this way about bankruptcy because of an in-depth report I did last year on three bankruptcy attorneys and their work. I understand that it’s for when life extremely sucks, not for when your lifestyle is inconvenienced.

    • Mel

      See below. This is what I was talking about when I mentioned being versed in a
      topic and not emotional. Bravo for a well stated argument!!!

    • Bbzinha

      I have been sahnceirg for information on this topic for awhile now. So, really appreciate you taking the time to write about it. Truly was difficult to find, so I wanted to post my first comment out of gratitude

  • Mel

    I’m not versed enough in the topic to say yes or no – and my only opinion would be based on emotions – I’m getting better at not letting my emotions lead me lol

    However, Prior to bankruptcy reforms 1998 & 2005 once upon a time student loans were discharged – and so many people got the opportunity to get an education graduate and then file bankruptcy. By the time they were 28-31 they got a clean slate. All I can say is I’m not hating on them. Wish it was clever enough to get that benefit.

    • Mel

      Edit: I wish I was clever and quick enough to get…

  • EJ

    I think that as a nation we’re sending the wrong lesson to young people when our laws allow individuals who max out credit on cars, clothes, vacations, and other consumer goods to declare bankruptcy, but that if they (have the nerve to) pursue a higher education, they’re on they own.

    Also, if you want to talk about abuses of policy, just look at how student loans have become a profit bonanza for the banks. Since bankruptcy protections were removed from student loans, the banks have shown a total unwillingness to work with borrowers who fall on hard times, due to serious illness, natural disasters, or prolonged job loss. The banks refused to work with these borrowers because of financial incentives: despite the fact that the loans are guaranteed, the banks got greedy and continued to tack fees and penalties on loans to the point that there are a number people who owe more than triple what they originally borrowed, even after years of on-time payments.

    Also, state schools are no longer the bargain that they once were. Many cost $14-18k per year for in-state tuition. The days where a student could pay their way through college with a scholarship and a work-study or summer job are long gone.

  • lou

    On being on the end of blessing of student loans were my husband and I would have no problem paying them back if it was the original amount of 120,000.00 five years ago and now we are looking at over 500,000.00 to pay back no joke. He would have been better off not going back to school and getting a degree to make a better life for us and our 4 children. We just try to keep our head above water with no end in sight we will be working till we are 100 years old to pay it back. We can’t buy a house so all our money gets thrown away on rent we can’t even buy a car the car we do have my father had to put in his name. Its a sad world because these lenders will loan you the money knowing that there is no way you can pay them back and jack the rates up as high as they would like… My advise don’t go to college.

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