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follow MisterLefty 2018 Jul 10, 4:13pm
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Why did Congress make student loans non-dischargeable?In a word, lobbying.Before there was an exception to discharge, less than 1% of student loans were discharged in bankruptcy. But lenders raised concerns about the potential for moral hazard (students discharging their debts soon after graduation), without providing any evidence that this was a problem. First there was an exception made for government loans and loans made by nonprofit institutions of higher education, with waiting periods that were gradually lengthened and ultimately eliminated in favor of complete nondischargeability (except in cases of undue hardship, a very harsh standard). Then in the 1980s commercial lenders succeeded in getting the words "of higher education" struck from the law, allowing an exception to discharge for commercial loans so long as a nonprofit was somehow involved in making the loans. This lead to the creation of nonprofit student loan guarantors. Then in 2005 all qualified education loans were excepted from discharge, even those that do not have a nonprofit involved in making the loans. The irony is that TERI, a nonprofit guarantor of private student loans, was able to file for bankruptcy while the borrowers of the loans they guaranteed are not eligible for a bankruptcy discharge.
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s that no bank it its right mind would offer students loans if all the student had to do is declare bankruptcy soon after graduation. These easy loans were needed to spare colleges the burden of cutting costs.
The reason they are "non-dischargeable" in bankruptcy is that no bank it its right mind would offer students loans if all the student had to do is declare bankruptcy soon after graduation. These easy loans were needed to spare colleges the burden of cutting costs.