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How it became so difficult to discharge Student Loans in Bankruptcy?

Student loans, the largest form of debt in USA after mortgage debt, are almost impossible to discharge in bankruptcy, unless you are able to prove that repaying your student loans would cause an undue hardship to you. The latest reports on Student loan delinquency show that borrowers are having a hard time paying off their loans. This fact raises the question of why the bankruptcy process is so difficult that it makes discharging student loans nearly impossible?

Here is the reason why: Student Loans were dischargeable before 1976. However, the introduction of the US Bankruptcy Code (11 USC 101 et seq) in 1978 limited the chances of education loans being discharged. Following the new code, many other changes in the law further narrowed the dischargeability of education debt.

Below are the major changes in student loan reforms under the US bankruptcy code.

  • 1976: A regulation prohibited the discharge of education loans made by the government or a non-profit college or university during the first 5 years of repayment. Previously education loans were dischargeable in bankruptcy without any exceptions. The initial sanction of the law happened in 1978. Loans were dischargeable there after if they had been in repayment for 5 years, or had represented undue hardship.

  • 1979: A revision to the law (P.L. 96-56, 8/14/1979) prohibited inclusion of periods during which the repayment obligation was suspended, such as deferments and forbearances, from the 5 year period to discharge a loan. It also broadened the definition of "to a governmental unit, or a nonprofit institution of higher education".This meant government loans included all loans insured or guaranteed by a governmental unit, and not just those made by a governmental unit. Loans to a nonprofit institution of higher education were considered as loans "made under any program funded in whole or in part by a governmental unit or a nonprofit institution of higher education".

  • 1984: The Bankruptcy Amendments and Federal Judgeship Act of 1984 (P.L. 98-353, 7/10/1984) changed the language of accepting loans from a "nonprofit institution of higher education" by striking the words "of higher education". This opened the door for private student loans to be excepted from discharge.

  • 1990: An amendment changed the time period required before a loan could be discharged from 5 years to 7 years. ( P.L. 101-647, 11/29/1990).

  • 1991: The Higher Education Technical Amendments of 1991 (P.L. 102-26, 4/9/1991) eliminated the statute of limitations and the defense of laches on federal education loans. Previously there was a six-year limit.

  • 1998: The Higher Education Amendments of 1998 (P.L. 105-244, 10/7/1998) struck the requirement that allowed education loans to be discharged after 7 years in repayment.

  • 2005: An amendment enacted by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (P.L. 109-8, 10/17/2005) added an exception to discharge for qualified education loans, which includes most private student loans. Before this amendment only private student loans made under a "program funded in whole or in part by a governmental unit or nonprofit institution" were excepted from discharge. However, most private student loans included a nonprofit organization as the guarantor, and the courts have interpreted such loans as excepted from discharge.

  • 2007: The College Cost Reduction and Access Act of 2007 (P.L. 110-84, 9/27/2007) added income-based repayment as an option within both FFEL and Direct Loan programs. This repayment plan bases monthly loan payments on 15% of discretionary income, with discretionary income defined as the amount by which adjusted gross income exceeds 150% of the poverty line. After 25 years in repayment, the remaining amount owed is forgiven. It yields a lower monthly payment than the income-contingent repayment plan. The use of 150% of the poverty line as a threshold aligns the repayment plan with standards for bankruptcy fee waivers.

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