Milwaukee, WI Bankruptcy Law Blog

Sunday, December 10, 2017

Why Can’t Student Loans Be Discharged?

Student loan debt is a serious and growing concern for many debtors. Student loan debt has surpassed credit card debt. The median borrower with outstanding student loan debt for his or her own education owed $17,000 in 2016. Around 11% of students default on their student loans within three years of leaving college.

Unfortunately, as I discussed in a blog post a few months ago, student loans cannot usually be discharged via bankruptcy. In this post, I’ll explore the history behind this policy, and offer some alternatives to bankruptcy that my clients with student loan debt have found helpful.

It’s All About Incentives

The fact that student loans are not dischargeable is not something that can be blamed on any one person. There’s no evil banker twisting his moustache behind the policy. Rather, it is a policy choice that was made by Congress decades ago.

Unlike many other types of debt, student loan debt is not tied to any collateral. Nobody can repossess the lessons you learned while sitting in a lecture hall to pay themselves back if you don’t have to cash to do so. This is one of the main reasons student loan debt is not dischargeable.

But compare this to other types of debt without collateral that is dischargeable, including credit card debt and gambling debts. These debts without collateral are typically dischargeable. In the eyes of policy-makers, the difference is in the magnitude and scale of the potential debt, and the perceived societal benefits tied to educational debt.

Most people cannot rack up too much credit card or gambling debt without being cut off by creditors. Educational institutions on the other hand will keep giving you loans because they know it will eventually get paid back since it cannot be discharged in bankruptcy. If educational debt was dischargeable, it would be harder to get access to, and fewer people would therefore be able to go to college.

Beyond Bankruptcy

Although student loans cannot typically be discharged in bankruptcy, if you are struggling to make your payments, there are options available to you.

Income-driven repayment (IDR) plans allow debtors to make payments that are based on how much money the debtor has coming in each month. One of the great things about certain IDR plans is that they can be adjusted frequently. So, if you miss work because you have been ill, or you get a bonus at the end of the year, you can adjust your payment to match your income.  

Many lenders will also negotiate the details of your repayment plan. For example, if you want to make your payment close to pay day so that you can better budget your remaining funds, your lender should be receptive to this.

You might also be able to refinance your loans to get a lower interest rate so that you end up paying less overall over time.  

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| Phone: 414-436-8428