Student Debt in Bankruptcy, Part 2: Federal Loans vs. Private Loans

More than full two-thirds (71%) of all students graduating college in the United States are doing so with some amount of student debt. According to the Consumer Financial Protection Bureau outstanding student loan debt has surpassed $1.2 Trillion. This debt is saddled upon the youngest of people, as they just begin to attempt to enter the workforce.

There is simply no question in my mind that Student Debt is the next bubble that is drowning an entire generation — and often their parents too.  So many of my clients come in drowning in debt, and often one of the key factors causing all of their debt issues, is their inability to pay for college — often ten plus years after they have graduated. That leads to additional debt as the job market doesn’t really allow much in the way of a standard of living for too many recent (and even not so recent) college graduates.  For these young members of the workforce not paying their student loans is simply not an option.  Debt has a way of compounding until it just isn’t possible to draw more credit. In my opinion NO ONE should be forced to choose paying their student loans and putting food on the table or a roof over their heads. But all too many people are forced to do just that. Amazingly there are legal avenues available, such as bankruptcy, to dispose of most types of debt, but generally not student debt.

That, however, was not always the case. Until 1976 all student loans could be discharged in bankruptcy just like any other unsecured obligation. In 1976, Congress, in response to a belief that bankruptcy was being overused to discharge obligations owing to Uncle Sam, amended the Higher Education Act. Under the Amendment, Student Loans could only be discharged after a period of five years elapsed after repayment began, or in cases of “undue hardship”. In 1990, Congress removed the ability for Federal Student Loans to be discharged regardless of how long a person waited, except in cases of undue hardship. Thus, after 1990, a federal student loan that was previously dischargeable once a waiting period passed — similar to the way tax debt is currently dealt with — became virtually impossible to discharge in bankruptcy.

None of this affected private student loans. Private student loans were completely subject to the discharge in bankruptcy up until 9 years ago when Congress passed the Bankruptcy Abuse Prevention Consumer Protection Act 0f 2005 (“BAPCPA”, or as I like to call it the “Consumer Protection Act that did nothing to protect consumers”). BAPCPA swept private student loans into the mix with Federal Student Loans – which as you will recall were originally limited from discharge to protect the federal government. Now, no student loans, including private student loans, can only be discharged under extraordinary circumstances. [I’ll discuss those circumstances in the coming weeks in this series of posts.]

Federal Student loans are also NOT subject to ANY statute of limitations. I once had a prospective client come in to see me who had forgotten about a student loan from the mid-1970’s. The lender had also seemingly forgotten about her for about 30 years. Her original debt had more than quadrupled due to interest in that time. She could simply not wrap her mind around the idea that the debt was not going anywhere, that she had no choice but to work with the creditor that had simply fallen asleep at the switch for over 30 years.

Had the debt been owed to a private student lender, things would have been different. State statute of limitations on contracts DO APPLY to private student loans. In Massachusetts, that means that after six years of failing to pay your student loan, assuming the lender has not initiated a lawsuit, the debt is simply gone. While this would be solace to my client whose lender woke up after 30 years, the reality is that private student loan lenders can be quite aggressive in seeking to collect on their debts, and the interest rates can be significantly higher than with government back student loans.

While we are typically unable to discharge either private or federal student loans in a Chapter 7 bankruptcy, there are sometimes things we can do to at least make the crisis of a student loan in collection more workable, particularly in Chapter 13. If you or someone you care about is struggling with debt related to college loans or other debt, contact an experienced bankruptcy lawyer today. Call the Law Offices of James Wingfield at 508-797-0200, visit the contact page on our website or fill out the form below to schedule a consultation today.

For more on Student Loans in Bankruptcy, see Part 1 of this series.