Why Are Student Loans So Difficult to Discharge in Bankruptcy?

by Chip Parker, Esq.

April 12, 2007

In light of the recent news that Sallie Mae, America’s largest student loan provider, fraudulently provides monetary incentives to schools pushing their student loans, it makes one wonder why loans from this company, and other student loan companies are (a) guaranteed by the U.S. Government, (b) given extraordinary collection powers and (c) are virtually non-dischargeable in bankruptcy.  Nowhere have I found a decent explanation.

At first blush, it seems obvious.  Higher education is expensive, and young borrowers would not otherwise have the established credit to borrow the funds necessary to go to college.  Lending to this group would certainly never occur without guarantees backed by the U.S. Government.  Really?  Have you been to a college campus lately?  Like the cigarette industry marketing to minors, credit card companies set up carnival booths and give away merchandise in exchange for filling out a credit application.  They practically beg to lend young students money.  By the way, Citibank, who is also bribing institutions to hawk their student loans, provides student loans guaranteed by the government and totally unsecured credit cards to the same collegiate borrowers.  So why is the guarantee necessary?

What would happen if the U.S. government stopped guaranteeing student loans?  Would people stop going to college and graduate school?  Would there be a shortage of doctors?  A likely result is that young people would scrutinize the absurd cost of many institutions, and said institutions would actually lower the cost of education to compete.

Student loans are too easy to get, and too difficult to get rid of.  By virtue of section 484A(a) of the Higher Education Act, there is NO limit to how long the U.S. Department of Education, or the guaranty agency, can collect, sue, or enforce judgments a borrower in default.  That means forever.  They can garnish wages without suing the borrower.  They can collect credit card-like interest, penalties and collection fees.  They can take a borrower’s federal income tax refund.  They can even take Social Security payments, both retirement and disability.  Wow!

In bankruptcy, discharging a student loan is extremely difficult, as pointed out in Andy Miofsky’s article.  Given all the protections afforded to lenders who turn educators into pimps, it makes no sense why discharge should be so difficult.  As usual, the burden falls back on the middle class, who are too poor to pay for college but too rich for financial aid.

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Chip Parker is the managing partner of Parker & DuFresne, P.A., where he represents Northeast Florida businesses and consumers facing bankruptcy, and homeowners facing foreclosure. His firm files more homeowners in the Mortgage Modification Mediation Program than any other law firm in Northeast Florida. Parker is the recipient of Jacksonville Area Legal Aid's prestigious Award for Outstanding Pro Bono Service. Mr. Parker is an active member of the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.

Last modified: June 12, 2011