Is the Student Loan System on the Brink of Destruction?

by Phil Stott | October 14, 2015

  • My Vault

In news that will bring hope to the heart of many a debt-saddled millennial, a federal court in Boston is currently considering an appeal by someone who is hoping to be able to break the decades-old restriction on discharging student loan debt in bankruptcy.

If the court finds in the favor of 65-year old Robert Murphy, allowing him to discharge more than a quarter of a million dollars of student debt, there are potentially massive ramifications for the student loan industry as a whole. The reason: as the case suggests, in a bankruptcy filing, student loans are treated differently under the law than other forms of personal debt.

Why? Because unlike other debts, defaulting on a student loan doesn’t cost you anything but your credit score—even if the bank could repossess your degree certificate, you’d still have the knowledge and skills long after you came out of bankruptcy. So why wouldn't you do it?

For that reason (plus, y'know, lobbyists) Congress carved out the student loans exemption in the bankruptcy code back in the 1970's, and it has remained the status quo ever since.

Until now. Possibly. Kind of. Maybe.

Here's the catch: Robert Murphy is 65 years old. Formerly the president of a manufacturing firm, he has not worked since being laid off in 2002. Despite that, according to Bloomberg, "From 2001 through 2007, Murphy took out several Parent PLUS student loans – federal debt parents can use to finance their kids' education – to send his three children to college."

Let's just run through those facts again: someone in a C-level position took out a series of student loans near the end of his working life to pay for someone else's education despite not having a job for most of the period those debts were being accrued. Small wonder that lawyers on the government's side have suggested that Murphy's case "smacks of gamesmanship."

Millennials, this may not be the martyr you've been looking for.

But still: the bill for those loans currently sits somewhere north of $246,000, with little to no prospect of ever being paid off. Why wouldn't the government just cut the guy a break, accept the reality of the situation, and write down the debt?

Here's why:

Growth of Annual Student Borrowing Outpaces Growth in Students 

You let one guy discharge his debts, and guess what thought crosses the mind of almost everyone else represented on those charts?

While I'm certainly no legal expert, if I had to guess I'd say that we haven't heard the last of this case, whichever way it goes: Murphy seems like a man with nothing to lose, while the other side has the small matter of the future of higher education and the student loan sector potentially hanging in the balance.

What’s your take on the case, and the student loan system in general? Have your say in the comments below.

Read More:

A Hidden Cost of Grad School Finance

Has President Obama Solved the Student Loan Crisis?

You Just Passed the Bar: Here's What's Next for Your Student Loans

Filed Under: Education | Salary & Benefits

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