The Truth about Student Debt

There are a few ready talking points when discussing the student-loan crisis: the collective $1 trillion burden of debt, how student debt is now larger than credit card debt in this country, the fact that the 90-day delinquency rate spiked to 11 percent last year, meaning over one in ten borrowers are behind on their payments—all facts that don’t give much hope to those with loans, or those trying to resolve the financial crisis.

Another widely repeated belief is that student loans are completely nondischargeable in bankruptcy, a statement that a quick fact-check proves to be rated “pants on fire” and one that is causing tens of thousands of borrowers to suffer for no reason, for years.

A new empirical study of a nationwide sample of bankruptcy cases by Jason Iuliano, a Harvard Law School graduate and Princeton political science PhD student, shows that in 40 percent of cases where a student loan debtor sought forgiveness of their loans as part of a bankruptcy case, the judge granted at least some relief.  But here’s the kicker: In 2007, the year Iuliano studied, only 0.1 percent of all student debtors who filed for bankruptcy asked the judge to consider writing off all or part of their student loans. “Ultimately, it seems that bankruptcy filers’ lack of accurate knowledge of the system is the main problem,” wrote Iuliano.

Why did self-proclaimed borrowers’ advocates like me perpetrate such an inaccuracy? Well, in normal bankruptcy proceedings, student loans are nondischargeable. In the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, Congress stated student-loan borrowers would be required to file an “adversary proceeding”—a type of lawsuit within a bankruptcy case—to prove “undue hardship” in order to get their loans forgiven.

People who fall behind on their student loans are often hit with punitively high interest rates and penalties that can equal several times the original amount borrowed. The federal government has unusual power to recover its money, for example, by seizing tax returns or disaster relief payments.

Without bankruptcy as a recourse, some desperate student loan borrowers with insurmountable debts are forced to go underground, living without credit of any kind.

Congress did not define undue hardship, so nobody really knew what it meant or how hard a standard it was to meet. But over the past decade the courts have set a widely accepted standard. “Undue hardship” requires people to prove 1) The debtor cannot maintain a minimal standard of living for herself and her dependents if forced to repay;

(2) that there are good reasons to believe this situation will continue for a good part of the repayment period (i.e. this is not a case of a medical student in residency who is going to be earning a $180,000 salary within two years) and (3) that the debtor has made good faith efforts to repay the loans so far.

Iuliano found that judges applied this test in a reasonable way. The 40 percent of people who managed to have some or part of their loans forgiven were less likely to be employed, more likely to have a medical hardship, and had lower annual incomes the year before they filed for bankruptcy, than the sixty percent who failed.

In other words, they were like this anonymous poster on a site featuring personal testimony from many student loan borrowers went up as part of the Occupy protests in the fall of 2011.

“I have an ER bill I can’t pay, an untreated skin condition I can’t see anyone about, wisdom teeth coming in sideways I can’t get corrected, and asthma I treat with coffee to save the inhaler for emergencies,” wrote a young computer programmer with $60,000 in student loan debt. “I live on unemployment in two spare bedrooms in my mother’s double-wide.

I’ve gone bankrupt to escape credit cards, but student loans are for life.” 

Anonymous, if you are reading this, that’s not true. You may be able to catch a break after all. Iuliano’s paper deserves to be much more widely reported—the only mainstream news outlet to pick up the story is the Huffington Post.  The Consumer Financial Protection Bureau, which has taken steps to advocate for student debtors, should publish a guide to pursuing student loan discharge with an adversary proceeding. It costs much less than filing for bankruptcy, and you don’t even need a lawyer—Iuliano found no statistically significant difference in outcomes between debtors with and without attorneys.

A leap in student-loan forgiveness rates would offer rescue to the most vulnerable borrowers and help the administration in the eyes of those who support the Occupy movement. It would also, less obviously, be a good thing for the student-loan finance system as a whole. Bankruptcy laws help rationalize the market for credit. Knowing that borrowers have protection will ensure that lenders take seriously the risks that they are assuming, which could help stem the tide of growing loans.


Bankruptcy protections exist for student loans, could have fooled me. Who's pants are on fire here? The irony is unbearable. The author has not researched this issue too well or else they would know that even quadriplegic's have not been able to get resolve for their student loans even with the undue hardship bankruptcy proceeding. In fact all of the basic free market mechanisms of consumer protection have been removed from this debt instrument; Truth in Lending, common sense usury laws, statute if limitations, right to refinance, consolidation and many more and of course, bankruptcy in 99.9999999% of cases. Additionally, the collection powers of lenders is greater than that of even criminal fines as restitution does not always full repayment or interest/fees. The plain truth is that bankruptcy IS NOT an option for student loans. Go ahead and ask a bankruptcy attorney yourself if you believe otherwise. These are just the facts. Figures don't lie, liars figure.

Our younger generation will have a rough go. I read a similar article about this. Credit cards area really problem and without it we can't buy anything anymore. Also keep your financial house in order and if you get into trouble clean up your credit. Use companies like Lexington Law to help you if you can't do it yourself.

Student debt is stunting the growth of the economy. Student loans have increased by 500% over past decade. As the next generation graduates from college, they are plagued by insurmountable debt that places demands on their income, limiting their ability to spend their earnings in ways that stimulate the economy.

An old version of the entrance counseling had a true/false question that stated
"student loan debt can be discharged in bankruptcy." and the answer they gave is that it was true, but very rare. I have always counseled my students to not consider that an option.

I hope the government will do something about this because student will need assistance in their study since not all are scholar, There maybe loan agencies that help this kids however if the interest are soaring high then they can't continue to do their schooling. Let us help these kids guys.


I think that student loan debt is just killing the US economy. Young people borrow more and more to be able to afford college. That’s why national college debt even can’t start to decrease. I have never though that higher education in the US will be so expensive. Lots of people set the education as a main priority, they think that successful career is impossible without a college degree. And considering such a high demand it’s important to make American education affordable. It's wrong when the biggest part of college graduates leave colleges with thousands dollars of debt and they work hard all life to be able to pay it off. Lila from company

Young people will really have a hard time. Everytime I read news there is article about this problem. They should really do something about the credit cards and how people are spending money they don't have in the first place. Having a good credit these days is really important. Game Hack

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