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Draft Democratic Platform includes student loan relief in bankruptcy

On Behalf of | Jul 6, 2016 | Bankruptcy, Firm News

On July 1, the Democratic party released its draft platform, which includes the following statement:

Democrats will restore the prior standard in bankruptcy law to allow borrowers with student loans (to) discharge their debts in bankruptcy as a measure of last resort.

While it’s unclear what that means, we presume it means the pre-1998 standard, whereby student loans that were more than seven years old (excluding periods of deferment/forbearance, or periods of prior pending bankruptcy) were discharged. There were other changes in 2005 which concerned making private student loans non-dischargeable, which was a small tightening of an already-difficult situation.

Over 41 million Americans now owe the government student loan debt — averaging $30,000 each. The Consumer Financial Protection Bureau estimates that more than one in four of those borrowers are either behind on their loan payments or in default. Many people are not working in the profession for which they obtained their schooling.

I suppose the counterargument are that discharging loans (albeit likely uncollectible) takes them off the government’s balance sheet, making our country even further in debt, and second, making student loans dischargeable would make it harder to get an education. My response is that first, it’s already pretty hard to get student loans from what I have experienced. And second, maybe if we weren’t throwing so much government-backed money to universities, enrollments might decrease and the cost of an education wouldn’t keep increasing by double digits.

It should be noted that student loans can get discharged in bankruptcy, if the debtor can establish it would be an “undue hardship” to pay. But courts have basically interpreted that to mean that unless the debtor is disabled, they can qualify for an income-contingent repayment plan, so it is virtually impossible to get student loans discharged under current law. Back in the 1970’s, student loans were dischargeable in bankruptcy. But it was considered abusive for new graduates to wipe out their debt, so the seven year rule came in. That’s the most likely “prior standard” referred to in the platform, which is specifically noted “***DRAFT – DELIBERATIVE AND PREDECISIONAL***.” If you believe this is a good idea, you should leave a comment.