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Something's Gotta Give: Should Student Loans Be Dischargeable in Bankruptcy?

Steven J. Richardson
Bankruptcy, Collections, Student Loan, DUI and Traffic Court attorney in Woodbury, NJ.
Comments (2)

I have been reading more and more about the "Boomerang Generation," as the economy makes it tougher and tougher to find a job. This is especially true of young people graduating colleges and universities without any prosopects of employment. They end up moving back in with Mom and Dad.

Unfortunately, their student loan debt ends up moving in with them. Young people are spending more and more money on higher education, including post-graduate degrees, and racking up more and more debt before they enter the job market.

How Did We Get Into This Mess?

I have written here before about how student loan debt is extremely difficult to discharge in bankruptcy. The requirements are stringent, although some have succeeded, but all in all it is very discouraging. Originally, student loans that were guaranteed by the government and more than seven years old could be discharged without showing real hardship.

Then in the nineties the seven year minimum was eliminated, and all Guaranteed Student Loans (GSLs) could only be discharged if "real hardship" was shown. Finally, in 2005, the bankruptcy code was changed again to make all educational loans, from any lender, nondischargeable absent said showing.

Is This the Next Big Crisis?

Massachusetts bankruptcy attorney Nicholas Ortiz, on his blog Student Loan Laws, posits in a recent post that "We've witnessed a lot of debt crisis lately: the mortgage meltdown, government bailouts, rising credit card defaults, and skyrocketing medical debt are a few examples. I am convinced that student loans are the next shoe to drop."

Hmmm.... I know, as any lawyer does, that there are very few jobs out there today for the newly minted lawyer. However, that does not stop law schools from continuing to recruit and grind them out. I am also sure that this is true in many career areas.

So What Needs to Be Done?

With all of this happening, I personally think that something has to give. Either banks have to be stricter about lending money for education if the degree (such as the law) is not one reasonably anticipated to result in employment that will generate income sufficient to pay it back, or the student should be able to discharge the debt if the job market does not live up to the hype of the educational institution.

What do you think? Let me know in the Comments to this post or go to my Facebook page and vote in the poll: Should student loans be dischargeable (Yes, no, or only if not backed by the government)?

2 Comments:
Loan: Lenders decide things for us all the time, like what kind of car or house we can buy. You may want to buy a Lexus, but banks may only want to lend you enough for a Ford Focus. It is all a matter of credit risk. Banks on student loans don't consider the risk as high because of the difficulty in discharging the debt in bankruptcy. I realize that you run a web site that gives information on student loans, but that should clue you in to this reality. If banks think you are a risk because you are seeking a degree that has a low likelihood of future employment, they should be able to refuse the loan. In return, however, the bankruptcy code should be changed to allow the discharge of those loans if they are granted. That is the point I am making.
Posted by Steven J. Richardson on August 9, 2011 at 01:19 PM
I don't want my lender deciding what I'll go to school for. I'd rather go to community college!
Posted by loan on August 9, 2011 at 01:22 AM

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