With President Biden’s student loan debt relief plan around the corner, and amid continuing issues for the U.S. economy, student loans remain a hotly debated topic. Regardless of whether Mr. Biden’s plan remains in place unchanged, or what happens in the economy generally, it’s safe to say that we will likely see massive alterations to the student loan industry in the coming years. A big reason for this is simply that the attractiveness of a college degree, from a “return on investment” standpoint, has dropped considerably in recent years, and will probably continue to drop. Furthermore, student loan debt remains one of the most difficult types of debt to wipe away; by design, student loan borrowers can rarely discharge their debt in bankruptcy without showing exceptional financial hardships. When we consider the state of the economy now, and other factors, we might be tempted to ask: why did Congress remove standard bankruptcy protections from student loans? To answer this, we need to look back to 2005.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)
In 2005, Congress passed BAPCPA, which essentially removed standard bankruptcy protections for both private and federal student loan borrowers. The law provided just minimal exceptions; for instance, those suffering from severe economic hardship may qualify for discharge under Chapter 7, but the definition of “economic hardship” in this context is quite narrow. Why did Congress do this? The underlying impetus apparently stems from student loan borrowers who, prior to BAPCPA, discharged their debts even without any economic hardship. Before BAPCPA, there was an alleged epidemic of highly educated professionals – physicians, lawyers, etc. – who simply declared bankruptcy immediately after beginning their careers, even though they weren’t necessarily suffering financially. The idea was to simply start fresh, with a clean financial slate, by discharging their student loans as they began their professional career. Whether there was sufficient evidence on which to base this claim is debatable, but clearly Congress believed that the problem was real enough to pass the law.
Although few would deny that professionals frivolously discharging student loans in bankruptcy is not a good thing, many today would contend that BAPCPA went a bit too far in the other direction. Now, one of the main claims made by student advocates is that the discharge requirements are overly strict, and that BAPCPA has hindered many students from being able to build a better financial future.
The best way to view the BAPCPA of 2005 is to simply say that this law was responsive to an issue which was pressing at that time. Today, 17 years later, we are now grappling with a host of new issues, and consequently we may see very large changes in the student loan landscape in the near future. This is precisely why we’re seeing actions such as President Biden’s debt relief plan: more and more, there is a recognition that student loans are having a huge financial impact on the country, and that some adjustment is needed. We may see bankruptcy protections restored in the future, but no viable attempt is being made to restore them at the present time. Students will simply need to be mindful of their borrowing, and better understand the full implications of their student loan obligations.
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