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Why Not Make Student Loans Dischargeable in Bankruptcy?


Aside from the fact that student loans are exorbitantly high, and carry abusive but legal interest rates and penalties for nonpayment, there is one other reason why student loans are so burdensome, onerous and crippling: it is nearly impossible to discharge them in bankruptcy, the way almost every other type of debt can be discharged.

Benefits of a Discharge

There are pros and cons to allowing student loans to be discharged in bankruptcy. One con that is often cited is the fact that the government, and thus taxpayers would be left footing the bill, essentially having paid for loans that will never be paid back. But this only tells part of the story.

Many presidential candidates have floated the idea of free college, and many detractors have pointed to the high cost to the government for providing free college. However, if bankruptcy were possible with student loans, free college may not be necessary.

That’s because bankruptcy works as kind of a “checks and balances” mechanism between debtors and creditors. The threat that debt could be discharged is what keeps many creditors from charging too much interest, or pressuring consumers too much. Push a consumer too hard, and a creditor could end up having its debt discharged in bankruptcy. Thus, bankruptcy or the threat of it, encourages creditors and consumers to try to work out a settlement that works for both of them. This would apply to student loans as well.

Economic Benefits

Bankruptcy also frees consumers’ money up, allowing them to put more money into the economy. For every creditor that has its debt waived because of a bankruptcy, there is a car dealership where that consumer can now buy a car, or a cable company that now has that consumer as a customer now that he or she has more available income to spend.

Imagine the overall effect to the economy if some consumers now could lower the amount of money they have to pay towards their student loans, because student loan companies, fearful of bankruptcy, would have to act fairly and reasonably towards them.

There is also the fact that even private loans, which have nothing to do with the government or taxpayers, get the same bankruptcy protections as government student loans do. This means that big banks or careless private lenders get protection and security with student loans that they don’t have with other loans.

How Student Loans are Discharged

Currently student loans only can be discharged by showing that they are an “undue hardship,” a standard that does not have to be met when discharging any other type of debt or loan. Additionally, “undue hardship” has been interpreted by courts to be ridiculously difficult and a standard that even the most desperate and struggling student loan debtors cannot meet.

Changes to bankruptcy laws have been recommended, but there is no real push to make wholesale changes just yet.

If you have been victimized by student loan collectors you may be entitled to damages, or eligible for help with your loan. Contact Jacobs Legal to speak with one of our Miami consumer rights attorneys today.

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