Student Loan Debt Crisis And The Role Of The Bankruptcy Court

Trillions of dollars in student debt is held by Sallie Mae. Student loan debt is preventing the 20-30’s year olds from entering the so called “middle class”. Today, politicians are discussing a remedy by allowing student loans to be discharged through the bankruptcy court without the strict adherence to In Re Brenner (undue hardship).  The undue hardship standard prevents most debtors from achieving the discharge of their student debt; however the government has foreseen this potential threat and the unbalanced power of Sallie Mae and students since the early 1990’s.


  • 1972 Student Marketing Loan Association (SMLA) is created by Congress. SMLA was pronounced as Sallie Mae.
  • 1973 Federal Financing Bank (FFB) finances SMLA.
  • 1980 Legislation strengthens SMLA and FFB relationship to provide loans for students.
  • 1982 SMLA enters GSE (Government Support Entity) debt market
  • 1983 Nonvoting common shares listed for Trading
  • 1987 Amendment to Bankruptcy Code and Determination of Dischargeability of Debt.
  • 1989 SLMA assets exceed 40 billion
  • 1992 Treasury oversight reduced and shareholders get voting rights
  • 1994-1995 Negotiation to privatization of SLMA
  • Bankruptcy Reform Act of 1994 (H.R. 5116) Determination of Dischargeability of Debt
  • 2004 SLMA fully dissolved
  • 2005 SLMA is a fully private sector
  • 2005 The Bankruptcy Abuse Prevention and Consumer Act eliminating the rights of debtors to discharge private student loans.

In the early 1990s the political risk became clear as the Clinton Administration and
Congress pushed to change the student loan program that SLMA and private lenders
participated in, charge SLMA a user fee (the 30 basis points “offset fee”), and
set up a program where the Federal government made loans directly to students.
President Clinton criticized SLMA in that their profits rose by 172 percent during the
period between 1986 and 1991, while its costs went down by 21 percent.
1992: The first Bush Administration threatened to veto the direct lending program and
obviously, SLMA also objected strongly to the pilot of directly lending to students. SLMA
became a target for Senator Paul Simon who said that the legislation was “not a bankers’
assistance bill or a Sallie Mae assistance bill, it’s a student assistance bill….” Senator
Durenberger pointedly criticized SLMA. “To be blunt, we can no longer afford to
squander billions of dollars a year …” he argued. “Those billions of dollars belong in the
classroom, not in six and seven figure salaries at Sallie Mae.” Higher Education Amendments of 1992 (P.L. 102-325), Conference Report, 138 Cong. Rec. S. 9262 (June 30, 1992), p. S9272.
Senator Simon singled out SLMA again on the day President Bush signed the bill.
Regarding the pilot program he said, “… we particularly ran into the opposition of the
Student Loan Marketing Association, Sallie Mae, which we created to help students.
They became a barrier.” He sounded a warning to SLMA, saying “… I think as we move
along we are going to have to take a look at Sallie Mae and what we have created
there.”The Higher Education Amendments, July 23, 1992, Remarks of Sen. Paul Simon, 138
Cong. Rec. S10158.

Coincidentally, at the profits continue to grow for Sallie Mae and debt grows for students; Bankruptcy Courts have become more austere with the discharge of student debt. Bankruptcy Court used to allow the forgiveness of student loans. Today private loans are non dischargeable and government loans can only be discharged in the most extreme cases. The only correct way to deal with student loans and to enable a whole generation to avoid the student debt sinkhole is to allow the debt to become dischargeable….again.