Should Bankruptcy Address Student Debt?

In a report released last year, the New York Federal Reserve estimated that student loan debt had climbed to $966 billion in 2012, with more than two-thirds of that debt owed by borrowers younger than 40 years old. The report estimated that 6.7 million borrowers, or 17%, are at least 90 days delinquent on their debt. In 2010, student loan debt surpassed credit cards to become the second largest form of household debt, only behind mortgages. The Consumer Financial Protection Bureau says that since 2012 student loan debt has climbed to $1.2 trillion as of May 2013—a 20% jump between May 2011 and 2013.

Although this type of debt is massive and growing, it’s usually not wiped away with a bankruptcy filing, a part of the bankruptcy code that some believe should change.

Senators like Elizabeth Warren and Dick Durbin have thrown their weight behind this issue and recently President Barack Obama unveiled a proposal that would ease restrictions on seeking forgiveness of private student loans through bankruptcy. However, private student loan debt accounts only for 10% of the overall total, with the remainder backed by the U.S. government.

Still, with a chunk of the delinquent student loan debt coming from for-profit colleges, many of which been accused of bad behavior, the U.S. Department of Education has been asked by senators and consumer advocates to examine the possibility of a new pathway to federal loan forgiveness for some students.