1 of 3 in Bankruptcy Have College Debt
One thing bankruptcy won’t fix is college debt, which – in contrast to credit cards – can’t usually be discharged by the courts.
One in three low-income people who have filed for bankruptcy protection from their creditors have student loans and face this predicament, according to LendEdu, a financial website.
The debt relief they can get from the courts is very limited, because the aggregate value of their non-dischargeable college loans is almost equal in value to all of their other debts combined, including credit cards, medical bills, and car loans.
Under these circumstances, a bankruptcy filing “does not sound like a financial restart,” said Mike Brown, a LendEdu blogger.
Although LendEdu analyzed data for low-income bankruptcy filers, the court’s inflexibility around student loans affects a wider swath of college-educated bankruptcy filers.
In the past, individuals were permitted to use bankruptcy to reduce their college loans. But in 1998, Congress eliminated that option unless borrowers could show they were under “undue hardship,” a legal standard that is notoriously difficult to satisfy.
While the legal requirement hasn’t changed since 1998, paying for college has become far more onerous. Americans today owe nearly $1.6 trillion in student debt, which ranks second only to outstanding mortgages.
The legal community and legislators are proposing revisions to the bankruptcy law pertaining to student loans to provide more relief. Some judges and attorneys are also weighing a more liberal interpretation of the undue hardship statute.
But change will not come fast enough for the millions of bankruptcy filers driven into court in part by staggering amounts of student debt.
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