Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

For All Our Good, Let Student Debtors Go Bankrupt

BOSTON (TheStreet) -- We've all heard the figures: Student loan debt in the United States now exceeds $1 trillion dollars, surpassing our nation's collective credit card debt.

Yet, unlike our credit card debt -- or any other debt, for that matter -- student loans for the most part cannot be discharged in bankruptcy. A report released in August by the Center for American Progress, though, calls for that to change.

Specifically, the report calls for guidelines to define and differentiate "Qualified Student Loans" from other loans. A Qualified Student Loan is one that offers reasonable repayment conditions including low interest rates and "access to favorable forbearance, deferment and income-based repayment options," as well as requiring successful track records for career success and salary prospects among graduates from participating institutions. The center argues that loans that do not meet this criteria should be eligible for discharge in bankruptcy just as credit cards are.

Student loan debt hasn't always been exempted from bankruptcy. Restrictions began in the 1970s out of concern that recent graduates in fields with lucrative career paths would simply accrue as much debt as needed and then discharge it via bankruptcy immediately after getting their degrees.

Congress implemented a reform in 1976 for five years' wait after completion of a degree before debtors could declare bankruptcy. In 1990, this was increased to seven years. The intent was to allow students to advance up a career ladder and develop good credit they would be reluctant to mar with a bankruptcy filing.

The law was reformed again in 1998 to exempt federal student loans from bankruptcy. In 2005, this exemption was extended to private loans with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act. Since then, student loans can now be discharged only in very rare cases of "undue hardship" -- usually the most dire of circumstances, such as the development of a debilitating medical condition.

Times have changed. The economic collapse of 2008 ushered in the Great Recession and along with it, historic rates of unemployment. The economic recovery has been slow, with recent college graduates ages 20 to 24 suffering levels of unemployment 40% to 50% higher than those in their age group nearly 35 years ago.

At the same time, the cost of college continues to balloon. Specifically, average college tuition and fees have increased by 440% in the past 25 years -- four times the rate of inflation. And yet a federal Pell Grant, which does not have to be repaid, now covers less than 34% of tuition for students from low- and modest-income families, as compared with nearly 70% in 1980.

College students now graduate with an average of $26,000 of debt, and about 45% of American families owe some student loan debt.