When Did Laws Go Into Effect Preventing Bankruptcy of Student Loans?

By Mary Jane Freeman

Prior to 1976, debtors could discharge all student loans in bankruptcy. However, that slowly changed with a series of amendments to preexisting bankruptcy law, making it harder to discharge student loans. As a result, as of 2013, debtors can only discharge education loans if they can prove that paying these loans creates an undue hardship for themselves and their dependents. The criteria for discharging student loans is so stringent that most bankruptcy filers can't satisfy it.

Early Bankruptcy Law

Bankruptcy was governed by the Federal Bankruptcy Act until 1976. However, Congress established a commission to look into the bankruptcy system during the 1970s and suggest reforms. In 1976, Congress adopted the commission's recommendations, which resulted in the Bankruptcy Reform Act of 1978, known as the U.S. Bankruptcy Code. The Bankruptcy Code replaced the preexisting Bankruptcy Act and limited the dischargeability of student loans. At first, the new law excluded student loans made by the government, colleges and universities from discharge; however, other student loans remained dischargeable as long as you were repaying for five years or they represented undue hardship. Over a period of approximately 25 years, additional limitations were enacted further eliminating the dischargeability of student loans. One notable one was the Bankruptcy Amendments and Federal Judgeship Act of 1984, which also made private student loans from nonprofit lenders non-dischargeable.

Bankruptcy Law Today

A significant amendment to the U.S. Bankruptcy Code occurred in 2005 with the Bankruptcy Abuse Prevention and Consumer Protection Act. Under this Act, additional qualified student loans are exempt from discharge, including most private student loans. Prior to the amendment, only private student loans funded in whole or in part by the government or a nonprofit organization were exempt from discharge.

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