Thursday, October 8, 2015
Student loans are more difficult to discharge in bankruptcy than most consumer or business debts. Discharge is only available if repayment “would impose an undue hardship on the debtor and the debtor’s dependents.” 11 U.S.C. § 523(a)(8).
These restrictions on discharge are controversial. Supporters note the possibility of strategic filings by student debtors with low assets and high expected future incomes and the danger of such defaults driving up the costs of credit. Skeptics argue that such concerns are empirically unsupported and that bankruptcy discharge provides an important mechanism for spreading the risks of investments in higher education.
In policy circles, momentum seems to be building for at least some relaxation of the restrictions on student loan discharge. The Department of Education recently released a report supporting discharge of private student loans in bankruptcy. The report argues that federal student loans should be treated differently from private loans because federal loans are not underwritten and because income based repayment with debt forgiveness is available for federal loans. Adam Levitin made similar arguments in the Wall Street Journal several months ago.
Access Group announced its support for discharge of student loans after a 7 year waiting period, as long as the loans are not already eligible for income based repayment with debt forgiveness after at most 25 years. The proposal also calls for restricting discharge for those who have previously discharged student loans in bankruptcy.
Access Group’s proposal appears to leave open the possibility of private student loans retaining current protection against discharge in bankruptcy by offering income-based repayment terms similar to those available from the federal government.