At the New York Times, Ron Lieber has a story about the treatment of student loans in bankruptcy. The story does a good job of explaining the harshness and capriciousness of the current system, but it is a story that bankruptcy lawyers and judgres already know. We have been discussing these problems since the early days of Credit Slips, but it is great to see the facts get to a wider audience. Maybe that will help us get some change.
The bankruptcy rules for dealing with student loans are broken. An easy fix would be to go back to the old rules where, after a certain amount of time has passed, student loans are treated like any other unsecured debt and subject to discharge. Back in 1976, the period was five years and then it became seven years in 1990. A time period like that sounds about right. Persons seeking to discharge their student loans before the expiration of the waiting period would still need to show undue hardship. The old system struck a balance between the problems that would ensue if recent graduates could too easily walk away from their loans immediately after graduating and the harshness of the current system.
Indeed, the reason we have the current problems is largely because "undue hardship" was meant to be a rare exception to the 5- or 7-year period before a student loan became dischargeable. Congress repealed the waiting period but did not do anything to the underlying standard. Now, we just have a harsh standard.
