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Should student loans be forgiven in bankruptcy?

Many Michigan residents have probably already heard that filing for bankruptcy will not protect a person from having to repay student loans in full. With few exceptions, a bankruptcy discharge will not apply to student loan debt.

However, with mounting student loan debt affecting many Michigan residents and other Americans, some are beginning to search for possible solutions. For example, the President has backed efforts to allow some people, such as those who work in public service, to avoid having to pay more than a certain portion of their discretionary income on their student loans. Another noted politician has suggested that students be allowed to refinance student loans on very liberal terms.

Some have also suggested that it may be time to rethink whether or not students should be able to discharge their loans in a bankruptcy. After all, on the surface it is hard to distinguish a student loan from any other type of investment that does not pay off as a person expects. Bankruptcy provides a fresh start to those who make other types of bad investments; so, logically, it should give relief to those who take a out a loan but then do not find that amazing dream job that colleges usually promise.

The problem with this argument, however, is that the federal government closely supervises the student loan market, meaning in practice that even bad credit risks can get a loan if they want one. Unlike other lenders, those banks that provide student loans do not always have the option of denying a person.

To overcome this obstacle, one person has suggested that colleges either tighten their admission standards or, should a student not be able to repay a loan, be forced to assume the student's financial obligation.

In any event, for now, student loans are generally not discharged in a bankruptcy. However, even for those with student loans, bankruptcy may still be helpful because it can relieve a person of other financial obligations so that they can focus on paying down that student loan debt.

Source: Forbes, "Let students discharge college debts in bankruptcy? Yes, but . . ." George Leef, July 24, 2014.

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