In 1976 the government revised bankruptcy laws based on the Education Amendments to exclude student loans from the types of dischargeable debt. The initial law was put in place largely because of rumors of doctors and lawyers taking advantage of the law to get rid of large-scale student debt right after college. While student debt rose to over one trillion nationally, these laws now affect nearly all student loans.
The current standard of discharging student debt is called “undue hardship.” Though not impossible, only 1,000 cases a year are ever brought to a judge, let alone are successful.
The average debt of a University of Minnesota student graduating in 2011 was $28,407. Minnesota is ranked third amongst states with the highest average of student debt. These statistics point to a growing problem in bankruptcy law when it comes to student debt. Though the government can’t have a multitude of students looking to take advantage of loans, the fact that students are treated with unique, damning behavior is alarming. Home buyers defaulting on their loans paralyze the housing industry. Thousands of Americans rack on credit card debt each year. Businesses everywhere make risky financial decisions. All of these parties have clearer routes to bankruptcy compared to a college student trying to crawl out from under massive debt.
The life of a student often complicates the situation. Most do not have the ability to plan financially for the future, and even some are not presented with correct information about their loans, such as with a recent U.S. Court of Appeals case. The term “student loan” is vague, as it can be used for anything from rent (housing debt) to personal expenses (credit card debt). Finally, our system incentivizes parties to give out large loans, as they are rarely discharged. Colleges can then raise tuition more easily because investors are so ready to give young people bulky loans.
Opening up bankruptcy laws to more cases would help shock investors from taking advantage of young people and perhaps ease tuition increases. With so much debt being accrued, these laws only purport the idea that student debt should be an accepted, institutionalized facet of student life, an idea that will only make higher education unreachable for thousands of young people.