A Maryland Democrat wants to turn back the clock to the disco days of the mid-1970s, at least as far as student loans are concerned.
Last month, Maryland Democrat John Delaney introduced House Resolution 449, which would remove paragraph 8 from Section 523 of the Bankruptcy Code, making school debt dischargeable in bankruptcy just like any other unsecured loan. Most likely, an institution could still withhold transcripts and take other punitive action against delinquent borrowers.
In a press release, Rep. Delaney maintained that “there is effectively a huge student loan loophole in bankruptcy law that’s hurting real people.” The second-term lawmaker supported similar legislation in the previous Congress, including expansions to the Pell Grant program and caps on student loan interest rates.
The Discharge Student Loans in Bankruptcy Act is currently pending before the House Judiciary Committee.
How We Got Here
Prior to 1976, student loans were on par with credit cards, medical bills, signature loans and all other forms of unsecured debt. Then, for some reason, Congress began to change the rules. Some Nixonians may have suspected that 1960s student radicals attended school on the government’s nickel and then refused to pay. Indeed, many people viewed Chapter 7 debtors as individuals who had recklessly piled up debts they knew they could not pay, and were undeserving of a fresh start.
Whatever the motivation, the rule changes continued. Later, in 1987, the Second Circuit Court of Appeals decided Brunner v. New York State Higher Education Corporation. Most other jurisdictions quickly adopted the so-called Brunner Rule, which made student loans dischargeable only in limited circumstances. Specifically, in order for the debt to be eliminated:
- The debtor must have made a good faith effort to repay the loans,
- Continued repayment would be a hardship on the debtor or the debtor’s family, and
- The hardship was expected to last for the entire period of repayment.
The much-criticized Brunner Rule eventually found its way into Section 523(a)(8), which currently stipulates that any educational loan is nondischargeable “unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents.”
That was then, and this is now. The average borrower from the Class of 2014 owes about $33,000, or nearly three times as much as the average Brunner-era debtor. The number of borrowers has almost tripled as well.
Interest rate caps and other stopgap measures are a much-needed source of relief, but they may not effectively address the crisis. Congress should seriously consider passing H.R. 449, because far too many individuals begin their working life already playing catch-up.
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