New Legislation Introduced To Make Student Loans Dischargeable Again

Richard Nemeth, our firm’s principal, traveled to Washington DC last month to lobby for changes in the bankruptcy laws which would be favorable to consumers, including two bills recently introduced that would make student loans dischargeable again.  Student loans were once dischargeable like any other debt.  Over the years, Congress has chipped away at the dischargeability of student loans bit by bit.  First, it passed a law that said that government backed student loans were only dischargeable after 5 years.  That period was extended later to 7 years; later the law was changed to make them nondischargeable regardless of length.  By the end of 2005, no student loans were dischargeable whether they were government subsidized or private, and regardless of timing.  Although Congress has maintained the limited provision which permits a debtor to discharge a student loan if repaying it would result in “undue hardship”, it failed to define what those words mean and the courts have established a standard that is extremely difficult to meet.  Basically, a debtor must prove that he will never be able to repay the student loans under any circumstances.  Many judges, legal scholars, and other experts have found this standard to be unfair and too difficult to prove.

Student loan debt has arisen to crisis proportions in the United States over the past few years.  More than $1.5 trillion is owed on student loans, a figure that exceeds all other forms of unsecured debt including credit cards.  The inability to discharge student loans is not only a problem for the students themselves, the financial consequences have metastasized to other generations.  Parents, and even grandparents, are using their retirement resources to help students pay their student loan debt putting these generations at financial risk also.  Unless something is done, student loan debt is likely to cause the next significant recession, just as subprime mortgage lending caused the recession in 2008.

The good news is that Senator Durbin from Illinois and Representative Jerry Nadler from New York have each introduced bills to make student loans dischargeable again.  In both bills, student loans would be fully dischargeable regardless of how long ago they were incurred and regardless of whether they are government or private loans.

Richard traveled to DC with the National Association of Consumer Bankruptcy Attorneys, the only national organization which advocates for legislation favorable to consumer debtors.  If these bills become law, it will be a very important step toward resolving the student loan debt crisis.