The Federal Government as First Creditor on Student Loans: Politics and Policy

Are federal student loans social policy or big business? We explore that question by examining whether, among other debts, student loans should be non-dischargeable in bankruptcy. Should the federal gov-ernment be the first creditor in line for bankruptcies that involve student loans? We examine the debate over this question, from its beginning in the 1970s to the present. We find considerable dissonance between the notions of student loans as social policy and as a business proposition. The federal student loan program has grown sub-stantially since its inception as part of the Great Society. As Scherschel (2000) observed, Since the inception of the federal education loan program in the mid-1960s, students and their par-ents have borrowed more than $300 billion to fi-nance the cost of college. American families re-quired nearly 30 years to borrow the initial half of this amount but only five years [since 1992] to borrow the second $150 billion, (p. 1) Clearly, student loans are big business—for the state guaranty agencies, the lenders, and the loan servicers. This article discusses the tension between social policy and cost by examining the law (which we refer to as the "First Creditor Law") that prevents borrowers from discharging student loans in bank-ruptcy, except in limited circumstances. We explore the debate over this issue, introduce new data, and make recommendations for change. Background The history of federal student financial aid in this country has revolved around the evolution of loan and grant programs. In this development, there is a basic tension between the needs of the individual student versus institutions of higher education and between low-income students compared to middle-and upper-income students. The Higher Education Act of 1965 (HEA) (20 U.S.C. § 1001 etseq.), the watershed event for fed-eral student financial aid, was born of the Grea