When consumer debts—credit cards, personal loans, past rent, medical bills, and much more—cripple an adult beyond reason, they have an important legislative fail-safe: bankruptcy. In filing for bankruptcy, the financially distressed can discharge their debts and have their financial slates scrubbed, but thanks to a legal exception, the 40 million Americans with student loan debt are left without recourse or relief should they need it. Public policy think tank Demos details the crisis-causing exception in a recent report, “No Recourse: Putting an End to Bankruptcy’s Student Loan Exception.”
Seven percent of all federal direct student loan debt belonging to holders not in school or in grace period is currently in default, according to Demos’ analysis of U.S. Department of Education data. That totals $42.5 billion. While most federal student loans take 270 unpaid days to go into default, an additional 17 percent of loans in repayment are more than 30 days delinquent, totaling another $58.2 billion.
The data reveals that a great many members of the student debt holding population are in financial crisis, but a series of bankruptcy amendments stemming from the 1970s have made it near-impossible to discharge that debt in all but a handful of cases. As Demos notes, student loan debt is effectively as difficult to discharge in bankruptcy as child support, alimony, tax claims and criminal penalties. The odds of having student loan debt forgiven are so infinitesimal, 99.9 percent of student loan holders who file bankruptcy don’t even attempt to have their student debt discharged.
The reluctance to even attempt student loan discharge might stem from the requirement that the filer prove ill-defined “undue hardship,” interpreted in most courts as a “certainty of hopelessness” standard. Those who seek forgiveness have to prove their student loan debt prevents them and their dependents from a minimal standard of life for the majority of the repayment period.
This is especially distressing in an age where the surest ticket into the trappings of a middle class life is a college degree, and where the burden of paying for an education has shifted largely to the debt-reliant student. “There is no sound rationale for applying such an unforgiving bankruptcy standard to federal student loans, particularly in an era where the vast majority of students must borrow in order to get a bachelor’s degree,” the report notes. “To simultaneously require that students take on debt while making that debt extremely difficult to discharge is a particularly cruel policy trap.”