My father is one of the reasons that student loans cannot normally be discharged via bankruptcy. Such an outcome was never his goal: quite the opposite, in fact, because exempting student debt from bankruptcy relief makes little economic sense and is patently unfair to the students saddled with such debt. A sensible reform of this law could slow tuition growth and put a lid on exploding student debt while sparing young adults the debilitating stress of a debt they can never hope to repay.
The path by which a small-town lawyer inadvertently helped change bankruptcy law began shortly after the Supreme Court in 1977 ended prohibitions against lawyers advertising. Soon after the decision my father placed an ad for his services in the Peoria Journal Star, making him the first lawyer in Illinois to advertise.
He knew that the novelty of an ad for legal services would create some buzz around town: However, he wanted a lot of buzz. So his ad—a 1-inch-by-2-inch display buried amongst the box scores on the sports page—read “Student Loan Relief Now: Discharge your Debts via Bankruptcy.”
Mission accomplished: The editorial page of the same paper thundered against such a tawdry ad shortly thereafter, back when such a thing mattered greatly, and a local TV station chimed in. A federal judge referred to my father as a shyster in court for publishing the ad, which earned the judge a formal censure and created another media storm. My father found himself in the news quite a bit in the ensuing months, and as a result became known as the bankruptcy expert in Central Illinois. His practice exploded: At one point he filed the majority of bankruptcy cases in the area.
At the time my father placed his ad, student loans were treated much like any other debt. A Chapter 7 or “straight” bankruptcy discharges most obligations, save tax debt or loans that were secured by pledging an asset against their repayment, as is commonly done with car loans. In 1976 Congress had made student loans slightly more difficult to escape by deeming that they could not be discharged via bankruptcy during the first five years of repayment unless there was “undue hardship,” although judges had considerable latitude to interpret hardship.
The year after my father’s advertisement appeared, Congress passed legislation making it much more difficult. A few years later further legislation made it all but impossible.
The rationale typically given for exempting student loan debt from bankruptcy relief is that new college graduates may attempt to jettison debt just before they reap the fruits of their education. It only takes a few medical residents or newly minted lawyers stiffing their lenders to gin up enough outrage to get a law passed, helped along by a provocative newspaper ad.
But my father didn’t write his ad solely to provoke: The burden of student loan debt is not a new phenomenon, and he did not—and in retirement still does not—see any special difference between someone who can’t afford to pay back their student loans and one who can’t afford to pay their credit card debt or health care bills.
We allow people to declare bankruptcy in acknowledgment that letting people escape from debt they cannot repay is a beneficial policy for both society and the economy. To exempt a particular type of debt—for an activity society should very much like to encourage—belies the very reason for a bankruptcy law in the first place.
Lending a student $60,000 to attend a private school he may have little chance of graduating from is not terribly different than the mortgage lenders who gave imprudent loans to people buying homes they could not really afford. Both the school and the company that made the student loan get their money regardless of what happens to the student, and as a result neither has any compunction about helping a student attend a school where his prospects are poor.
The provision prohibiting the discharge of student debt via bankruptcy is in some respects an anachronism, given that the bankruptcy reform of 2005 addressed the bogeyman the provision was originally written to prevent—by precluding people with an income above the median from filing a straight bankruptcy. Instead, those people must file a Chapter 13 “reorganization,” which requires debtors to assume a repayment plan set forth by the court that requires as close to a full repayment of their debt as deemed reasonable.