THE INDENTURED GENERATION:
BANKRUPTCY AND STUDENT LOAN DEBT
By Daniel A. Austin
Associate Professor, Northeastern University School of Law
A generation of Americans has borrowed heavily for their education, and hundreds of thousands of them are deeply in debt. Some 37 million Americans owe a total of approximately $1 trillion dollars in student loans. They constitute an Indentured Generation as many of them will be burdened with student loan debt for much of their lives. With one of the worst job markets in decades, members of the Indentured Generation who are in particularly dire circumstances will turn to bankruptcy for a “fresh start.” But most student loan debtors will not get relief through bankruptcy. This is because the Bankruptcy Code excepts student loan debt from discharge, unless the debtor can prove that repaying the debt would result in “undue hardship.” Courts have held this to be a very strict standard that very few debtors can meet. Accordingly, the relief that is provided to most debts under the United States Bankruptcy Code (“Code”) is denied for student loan debt.
This article proposes that the Bankruptcy Code be amended to allow a student loan to be revalued according to its actual fair market value. The fair market amount would be nondischargeable, and the remaining balance of the loan would dischargeable as general unsecured debt. This ensures that debtors who can pay their student loans will do so, but that those who are truly unable to do so will not be denied the “fresh start” that is bankruptcy is intended to provide.