Student Loan Defaults

Student loans are an intriguing part of the American consumer debt landscape.  They are at the same time very American and very Un-American.  They are American because they are at the center of social mobility.  Without government backed student loans many people who could not otherwise afford higher education can afford it, and education is central to class mobility.  However, they are also non-dischargeable in bankruptcy and not subject to a statute of limitations.  Congress was granted the ability to create bankruptcy laws in the Constitution, and it is an important part of the legal regime which protects debtors in this country.

Therefore, it is very difficult to avoid ambivalence towards student loans.  There is nearly a trillion dollars currently in student loan debt, more than the total amount of consumer credit card debt.  Thus, more and more people are attempting more and more different theories to convince bankruptcy courts that, for one reason or another, their student loan debt is dischargeable.  This has mixed results.  Last week, a Wisconsin bankruptcy judge sanctioned a debtor and attorney $30,000.00 for arguing that a student loan was dischargeable under the court's equitable powers.  Last year, the US Supreme Court, on the other hand, found that student loans were dischargeable when the creditor did not affirmatively object to their discharge.

The legal aspects of dischargeability of student loans, which are certainly restrictive for debtors, are wholly divorced from the economic realities of student loans.  The student loan industry argues that one reason why student loans can be offered at generous terms for the debtor is because the risk of default is much lower as a result of the loan's protections against bankruptcy.  The counter-veiling argument is that student loans are a credit transaction like any other, and, as such, bankruptcy is a necessary tool for apportioning the risk of default between the debtor and creditor.

This issue looks poised to move to the forefront of American discourse on consumer credit.  There is undoubtedly a push underway to increase the amount of money lent for student loans.  This is occurring at the same time as a push to decrease other types of unsecured consumer debts.  Add in to the mix an increase in the amount of federally backed student loans for students in for-profit higher education, and a decrease in the earning power conferred by higher education and the difficulty in the current treatment of student loans in bankruptcy becomes clear.