Is The Trillion Dollar Student Loan Industry Exempt From Bankruptcy?


By:Michael A. Cibik

In 2010, the annual volume of new student loans reached 100 billion dollars. There is now more than a trillion dollars in student loan debt on the books and this type of debt is growing rapidly. A new economic crisis is about to emerge. Student loan debt cannot be discharged in bankruptcy except under the most extreme of circumstances.


It is not only government-sponsored or guaranteed student loans that are exempt from bankruptcy discharge. Bank loans made to students, and relatives or friends who guarantee those loans, are facing discharge problems when the debt carries that “magic” designation as an “educational loan.”


Except in the case of “undue hardship,” a student loan is exempt from discharge in bankruptcy under §523(a)(8). The standards most commonly referred to by bankruptcy courts for establishing that undue hardship is imposed on the debtor or a dependent of the debtor are spelled out in the case of Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987). For more on the Brunner Test see my earlier article on the subject.


The National Association of Consumer Bankruptcy Attorneys (NACBA) has been promoting legislation to help consumers deal with the awful difficulties caused by increasing levels of student loan debt. Congress is taking notice of this problem as their constituent services staff are besieged with pleas for help. In a visit to my congressman’s Washington DC office recently, I was told that a high percentage of constituent calls are now coming from constituents having problems with student loan debt.


Not only do student loans enjoy protection from bankruptcy discharge, collectors of government-sponsored loans have extraordinary powers. Student loan collectors, when collecting a public loan, can garnish wages without court order, can intercept tax refunds, and default on a government sponsored loan can prevent a debtor from getting a home loan or contracting with the federal government.


To top off the benefits available for student loan debt collection, there is no statute of limitation on collection of a government educational loan, the debt can be collected until the borrower dies. This is a cradle to grave disaster that needs immediate attention from congress.

Michael A. Cibik, Esquire

Michael A. Cibik is a partner at the Philadelphia law firm of Cibik & Catldo, P.C. He is one of the few attorneys in the Philadelphia area certified by the American Bankruptcy Board.

If you or someone you know is having financial problems, stop worrying and call Michael at (215) 735-1060 for a free consultation.


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