“Before 1976, all education loans were dischargeable in bankruptcy.”

Time.com:

It’s no surprise that student loan debt is a major concern. Federal and private student loan debt surpassed credit card debt for the first time in 2010 and is expected to hit $1 trillion this year. At the same time as college graduates are experiencing record-high debt, they are offered little opportunity to get back on track. “There’s no way to diffuse the bomb if the status quo stays the same,” NACBA Vice President John Rao said in a press call with reporters.

Which is why the group is calling on Congress to pass legislation that would allow graduates to discharge loans they took out from private lenders, including for-profit companies like banks and student loan giant Sallie Mae. Similar legislation has been submitted over the past two years by Democrats without making much progress, but nevertheless, NACBA is hoping this year will be different.

Changing the nation’s bankruptcy code wouldn’t just give the group of lawyers more work, it would offer an option for students to get rid of debt that, at its core, is not really any different from other types of debt that the government does allow borrowers to discharge. “It’s kind of strange that credit cards are dischargeable when private student loans aren’t,” said Mark Kantrowitz, publisher of the financial aid websites, Fastweb.com andFinAid.org. “They should be treated the same.”

They used to be. Before 1976, all education loans were dischargeable in bankruptcy. That year, the bankruptcy code was altered so loans made by the government or a non-profit college or university could not be discharged during the first five years of repayment. They could, however, be discharged if they had been in repayment for five years or if the borrower experienced “undue hardship.” Then, the Bankruptcy Amendments and Federal Judgeship Act of 1984 made it so all private student loans were excepted from discharge too.

Two decades of further tweaks to the bankruptcy code ensued until 2005, when Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which made it so that no student loan — federal or private — could be discharged in bankruptcy unless the borrower can prove repaying the loan would cause “undue hardship,” a condition that is incredibly difficult to demonstrate unless the person has a severe disability. That essentially lumps student loan debt in with child support and criminal fines — other types of debt that can’t be discharged.

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2 responses to ““Before 1976, all education loans were dischargeable in bankruptcy.”

  1. Pingback: “Before 1976, all education loans were dischargeable in bankruptcy.” - Securitization & Mortgage Audit

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