Can student loans be repaid by bankruptcy? 4 questions answered

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Brent Evans, Vanderbilt University and Matthew Patrick Shaw, Vanderbilt University

(TALK) For decades, student loans were largely prohibited from being repaid through bankruptcy proceedings. This may change in accordance with the FRESH START Bankruptcy Law. Here, public policy researchers Brent Evans and Matthew Patrick Shaw, both from Vanderbilt University, explain why student loan debt usually cannot be paid off through bankruptcy and how that could change if the proposed bill becomes law.

Why can’t people now get rid of student loans through bankruptcy?


Paying off student loans in the event of bankruptcy, while not impossible, is difficult. Under the 1976 law, student loans are not dealt with during bankruptcy proceedings like other forms of debt, such as credit card debt or car loans. This policy stems from the Federal Bankruptcy Law Commission, which heard testimony that simply paying off student loans in the event of bankruptcy could undermine federal student loan programs. Congress was concerned that students could borrow thousands of dollars from the federal government, graduate, file for bankruptcy to pay off their student loans, and never pay off their education debt.

In addition to the Higher Education Act of 1965, Congress passed the 1976 Act that forced borrowers to wait five years after the first student loan maturity before they could repay the loan through bankruptcy. Congress created an exception to allow discharge during this five-year period if the loan caused “undue hardship.”

Congress extended the five-year bankruptcy ban to seven years in 1990. Then Congress extended it to the borrower’s life in 1998.

Excessive hardship tax exemptions are currently the only way to pay off student loans in the event of bankruptcy – a much higher threshold than many other common forms of debt. This higher threshold includes both federal student loans and, since 2005, most forms of private student loans.

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