Let Private Student Loans Be Discharged in Bankruptcy Filings

NEW YORK (MainStreet) — It sounds like a broken record: student loan debt is destroying the prospects for 20- and 30-somethings to enter the middle class. But it's still number one with a bullet on the nation's hit parade of insoluble problems.

Legislative attempts to deal with it on a piecemeal basis have had mixed results. Congressional lawmakers claimed victory last summer when they stopped the interest rate hike on Stafford loans, which were set to double from 3.4% to 6.8%. But the loans are tied to interest on T-bills in a spiking rate environment. By the end of the decade, 6.8% might seem cheap.

Earlier this month, three Senate Democrats introduced the Student Loan Bill of Rights, a comprehensive attempt to build protections into loans made to people who start their working lives with five-figure debt— no mortgage, no car note, just student loans. Seven of ten college seniors last year — the class of 2013 — had close to $30,000 in student loans.

"When we voted to stop interest rates on federal student loans from doubling, we promised to address the underlying causes of skyrocketing higher education costs and the resulting unsustainable student debt in America," said Durbin in a conference call with reporters on Thursday. "Over the last six months, our group of Senators has been working together on a legislative agenda to encourage reform to help students and their families. Students should not have to sign their lives away to pay for their education."

The Protect Student Borrowers Act of 2013 is designed to help make institutions of higher learning more accountable by requiring them to assume some of the risk in student loan defaults.

Durbin, Senators Jack Reed (D-RI) and Elizabeth Warren (D-Mass.) also introduced the Partnerships for Affordability and Student Success (PASS) Act, with a focus on need-based aid and grants to institutions to improve student outcomes, borrowing from Obama college ranking playbook. States will be required to have a comprehensive plan for higher education with measurable goals for enrollment, affordability, and student outcomes.

But further down in the weeds is another bill, the Fairness for Struggling Students Act of 2013 which would allow private student loans to be discharged in bankruptcy and treated the same as other types of private, consumer debt.

Like child support and tax refunds that are grabbed by Uncle Sam from people who are bankrupt, federal student loans will continue to be non-dischargeable in a bankruptcy proceeding — that's a non-negotiable gimme. But private loans, say Senators Durbin, Reed and Warren, are different.

"The law was unjustifiably changed [in 2005] to give private student loans the same privileged bankruptcy treatment as government loans, even though private student loans have vastly different terms and fewer consumer protections," they said. So a student loan from JP Morgan Chase, for example, should be treated no differently than a Chase credit card in the event of a BK filing.

"The bankruptcy code makes it especially difficult for people to discharge child support responsibilities, overdue taxes, and criminal fines," they said. "Privately issued student loans should not be on that list."

A bankruptcy bill introduced by Durbin last January and cosponsored by Reed that would restore the bankruptcy law pertaining to private student loans went nowhere. Its fate remains to be seen when the next session of Congress convenes next year.

The Department of Justice has stated that bankruptcy fillings jumped from 110,000 in 1960 to 1.6 million in 2003, a 16-fold increase, when the U.S. population grew by less than 30% during the same period.

According to Bankuptcy Law Information, 19% of Americans who declared bankruptcy in 2003 were between 18 and 24. 19% were college students.

 

—Written by John Sandman for MainStreet

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