Student loans are generally not dischargeable through bankruptcy in the United States for several reasons:
-
Public Policy Concerns: The idea behind making student loans non-dischargeable is to protect the federal student loan program. If students could easily discharge their loans through bankruptcy, it might jeopardize the availability and terms of future loans for other students. The government wants to ensure that funds are available for future students to borrow.
-
Potential for Abuse: There’s a concern that if student loans were easily dischargeable, some individuals might take advantage of the system. For instance, a student could theoretically borrow a large sum of money, earn a degree, and then immediately file for bankruptcy to have the debt wiped out, all without ever intending to repay the loans.
-
Nature of the Debt: Unlike other forms of debt, student loans are extended based on the promise of future earnings rather than current assets or creditworthiness. Since there’s no collateral backing the loan (like a house or car), the risk to lenders is higher. Making these loans non-dischargeable in bankruptcy helps mitigate this risk.
-
Repayment Options: Federal student loans come with various repayment options, including income-driven repayment plans, deferments, and forbearance. These options can make the loans more manageable for borrowers facing financial hardship, reducing the need for bankruptcy.
-
Historical Context: Initially, the non-dischargeability of student loans was intended to be a temporary measure. However, over time, legislative changes have made it increasingly difficult to discharge student loans in bankruptcy.
-
Protecting the Taxpayer: Since many student loans are federally guaranteed or issued directly by the federal government, unpaid loans would ultimately be a burden on taxpayers. By making them non-dischargeable, the government aims to protect taxpayers from bearing the cost of unpaid loans.
It’s worth noting that while it’s challenging, it’s not impossible to discharge student loans in bankruptcy. Borrowers must demonstrate “undue hardship,” which is a high bar to meet. The most commonly cited test for this is the Brunner test, which requires borrowers to prove that they cannot maintain a minimal standard of living if forced to repay the loans, that this situation is likely to persist for a significant portion of the loan repayment period, and that they’ve made good faith efforts to repay the loans.
The topic of student loan dischargeability in bankruptcy is a s