Why is Student Loan Debt So Sticky?


Why is Student Loan Debt So Sticky?

With all the current commotion regarding the possibility of student loan relief under the Biden administration, the present moment seems like a very wise time to discuss the “stickiness” of student loan debt. As most student loan borrowers are aware, student loan debt is unique in the sense that it is among the few types of debt which cannot normally be discharged in bankruptcy. If a person takes out a student loan, that loan is very difficult to discharge, even if that debtor encounters economic challenges in his or her career. What makes student loan debt so unique? Why can’t student loans be discharged just the same as other kinds of debt?

Bankruptcy Abuse Prevention & Consumer Protection Act of 2005

  The roots of the uniqueness of student loans can be traced to the Bankruptcy Abuse Prevention & Consumer Protection Act (BAPCPA), which was passed by the U.S. Congress in 2005. Prior to this key piece of legislation, student loan debtors could essentially discharge their debts without any major challenges. Basically, prior to BAPCPA, student loans were treated just like any other type of consumer debt (i.e. credit cards, medical bills, etc.). Lawmakers believed, however, that many graduates were abusing the bankruptcy code to simply erase student loan debt and start fresh immediately following graduation. There is debate as to whether this belief has an adequate factual basis, but nevertheless that is the belief on which the BAPCPA was developed and passed. After the BAPCPA, student loans were specifically excluded from normal bankruptcy protections. Instead of being able to discharge student loans as normal, borrowers can now only discharge student loans under very limited circumstances.

The Standard of Undue Economic Hardship

  The prohibition on student loans under the BAPCPA of 2005 has an important exception, the so-called “undue hardship” exception. Historically, qualifying for the undue hardship exception has been highly difficult; in fact, for most student loan debtors, this route is a near impossibility. The reason is because courts have traditionally interpreted this exception narrowly, and so a great deal of economic suffering is typically necessary for this exception to apply. If a student loan debtor does pursue this route, that person must file a separate motion with the bankruptcy court and then make certain demonstrations. As a general matter, those seeking to claim this exception must demonstrate the following: (1) a minimum standard of living for yourself and any dependents cannot be maintained with the current repayment expectations, (2) circumstances are such that you are not likely to experience an improvement in your ability to repay the loan in the near future, and (3) a good faith effort to repay the loan has been made. If these things can all be shown, then the exception might be triggered. But again, courts understandably limit the exception as much as possible. The reason, then, that student loan debt is “sticky” is because the interests which passed the BAPCPA in 2005 wanted them to be that way. Now, as the Biden administration continues to examine the desirability, and feasibility, of student loan relief, we may see this status change in the near future. For now, students are left with unusually sticky loans.

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