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Do We Need to Change Bankruptcy Rules for Student Loans?

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Do We Need to Change Bankruptcy Rules for Student Loans?This is the fourth article in a series devoted to consumer issues for National Consumer Protection Week March 3-8.

Ever since the Guaranteed Student Loan Program was established under the Higher Education Act of 1965 — offering government-guaranteed loans to students — an ongoing debate has ensued over whether a student loan borrower should have the same option of discharging the debt in bankruptcy as consumers facing default on other types of debt.

The most recent re-igniting of this debate arose this past January when Sen. Dick Durbin introduced the Fairness for Struggling Students Act of 2013 (S. 3219), that would mark a return to the pre-2005 days when private student loans could be discharged through bankruptcy like any other form of private debt.

With this being National Consumer Protection Week, and the Consumer Financial Protection Bureau issuing a call for private student loan borrowers to share their stories this week, what better time to take a fresh look at student loans — both private and federal — and seriously question whether student loan debt should be categorized the same way that delinquent child support, back taxes, and DUI-related personal liability debt are as a kind of debt that cannot be discharged in bankruptcy. Of all forms of consumer debt, only student loan debt is treated in this way.

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Free Credit Check & MonitoringFirst, let’s take a look at a very brief timeline of student loan history:

  • 1965: Higher Education Act establishes the Guaranteed Student Loan Program.
  • 1976: Higher Education Act amended. In response to claims of over-use of bankruptcy to discharge government loans, this law prohibited federal student loans from being discharged in bankruptcy until five years had passed since repayment began, and in cases of undue hardship.
  • 1998: Tax Bill established. After extending the five-year wait to a seven-year wait in 1990, this requirement became infinite — virtually eliminating discharge in all but the most undue of hardships — for discharging a federal student loan in bankruptcy.
  • 2005: Bankruptcy Abuse Prevention and Consumer Protection Act passes. Private student loans joined federal loans as being non-dischargeable in bankruptcy.

And here’s some background on private and federal student loans:

  • Private student loans tend to be the loan of choice for students after reaching the maximum loan amounts for federal loans, and for those attending for-profit colleges.
  • 46% of for-profit college students carry private student loans vs. 14% of public college students.
  • Federal student loans make up 80% and private student loans the other 20% of all outstanding student loans.

Finally, let’s illustrate the magnitude of student loan debt:

While this student loan debt problem took decades of complexities to get to the crisis proportions seen today, three trends are clear in terms of how we got to where student loan debt has surpassed credit card and all other types of debt:

1.     The cost of a college education has skyrocketed.
2.     Employment opportunities for graduates have dwindled.
3.     Wages have remained stagnant.

Add to this the inability for a low-or-no-wage college graduates to ever get out from under the mounds of student loan debt, and you not only have a catastrophe waiting to happen, but one involving trillions of dollars and millions of citizens whose only crime was trying to pay for an education.

While concerns of abuse, fraud, and accountability are often raised as reasons to continue disallowing this form of financial relief, there is no reason to believe the provisions in existing bankruptcy law can’t work to the degree that they prevent abuse of credit card, mortgage and other debt.

Possible solutions, such as an income-based approach, to this crisis will be discussed in future posts; however, for now an immediate step that can be taken in the right direction is by supporting the Fairness for Struggling Students Act of 2013.  While admittedly this bill only addresses 20% of student loan debt, it’s a start toward reversing an unfair law directed at one of the most economically vulnerable segments of the population who just happen to be our future.

This story is an Op/Ed contribution to Credit.com and does not represent the views of the company or its affiliates.

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  • Gerri Detweiler

    Barry – Excellent and important overview. Thanks!

  • Kelly

    I graduated with a teaching degree in December, 2010. I have not been able to find a job. My husband lost his job in 2009. He found a job after 18 months of unemployment, worked for one year, and got laid off again. He’s been unemployed for 14 months.

    We are about to lose our home that we’ve owned for 15 years. We are going to have to file for bankruptcy. We will be paying my student loans until we die, since they won’t be discharged with the bankruptcy. We are both 55. Life sucks!

    • http://www.credit.com Barry Paperno

      Kelly, thanks for helping to drive home what this subsidy to the student loan lending industry does to real people who are simply trying to do good work, i.e. teaching, and live a decent life.

      Your comments also highlight the fact that, while your mortgage lender and maybe a credit card company or two may have to take a loss if you file for bankruptcy, your student loan lender is well-protected and has nothing to worry about. I truly wish you and your husband the best.

      • Duchess of Bones

        Kelly, I understand your pain. Although I have not lost a home, I did have some serious medical bills and find that I’ve not been able to find a decent job beyond barely scraping by paycheck to paycheck at over 45 years old. I already declared bankruptcy once and student loans don’t qualify, darn it. It certainly /would/ be nice if there would be a break for those of us who have tried to pay off our federal student loans before we’re buried.

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  • http://howtogetyourloan.com Sally

    Great post Barry…I am still paying off my 20k debt with no end in sight. I feel for all my peers who are hurting in this bubbble even after getting their degrees!!

    • http://www.credit.com Barry Paperno

      Thanks, Sally. And your debt is actually below the average student loan debt for graduates! As you may have read, more than half of your peers who got their degrees are now working at jobs that don’t require a degree.

      It doesn’t take a math major to figure out that without changes to this scandalous level bankruptcy protection we provide for our student loan lenders, millions of young people (and old people too!) will never get out from under their student loan debt – ever. Scary stuff, but hang in there!

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  • tom glosek

    Barry, I co-signed a student loan for my son’s ex-girlfriend ( 8 yrs. ago ) . Needless to say she has made no attempt to make payments on this . What recourse do I have to get her to make payments and also settle with the lender. I would like to pay a percentage and remove my name from the note.

    • http://www.Credit.com/ Gerri Detweiler

      When you cosigned you agreed to fully pay the debt. The lender isn’t going to let you off the hook if the loan isn’t being paid. Unfortunately you are stuck in a very bad place: if you don’t pay your credit will continue to be hammered and the amount paid will grow. If you pay it you are unlikely to ever collect from her.

      If this is a private student loan, however, I would recommend you get advice from a consumer law attorney familiar with student loans. (One source for that information is TheStudentLoanLawyer.com.) There may be a statute of limitations that applies, and you may be able to work out a settlement to get your name off the loan.

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  • PTCLegs

    I took out a loan 30 years ago, then gave birth to a disabled child, not being able to repay at the time, the loan ballooned from $2,000 to over $30,000 with interest and penalties, I am now disabled myself and caring for two adult disabled children alone and still have this loan haunting me. I will never be able to even make small payments living on Social Security and fear I will lose my home and have my SS garnished.

    • Deanna Templeton

      PTC – Have you considered speaking with a bankruptcy attorney? Currently, including student loans in bankruptcy is extremely difficult to do but in certain situations it IS possible — and in your case, you probably have a better chance at meeting the “undue hardship” requirements than most. Before you rule it out entirely, it may be worth consulting with a bankruptcy attorney to at least explore your options. Under the current rules, you’d have to file an undue hardship petition and prove that you’re incapable of repaying the loans in order to discharge some (or all) of your student loans through bankruptcy. Even if you’re unable to qualify under the “undue hardship” requirements, it still may be worth consulting with a bankruptcy attorney in order to save your house. Worst case, filing bankruptcy may help protect you from losing the house as long as you’re able to maintain your payments after the bankruptcy.

  • Anthony_Eller

    The fairness for struggling student Act would be a start but, Federal Loans should be included also. Sallie Mae started out as a government sponsored enterprise in 1972 in 1996 Congress approved privatization of Sallie Mae and in 2004 Sallie Mae completes privatization. Sallie Mae also has their own collection arm and are buying up more collection companies now! This shows us the amount corruption to the very core. How can you lose money if all the laws are stack in your favor? This is on the backs of our children! The Government waste depending on what report you read anywhere from $600 Billion to $1 Trillion in 2012 alone! I propose a I year instatement of student loan bankruptcy both Federal and private to be shown on c-span and let the American people have the right to vote on permanent reinstatement The lobbyist and special interest are running our Great Country

  • michael

    mike i applied fro all my student loans i have by myself and co- signed one for my ex wife. I went to college thinking i would be able to make decent living but i’m not. I haven’t been able to afford to make payments on them for several years so they are going to start garnishing my wages on top of that i pay child support every week i barley make over 200 a week now so no i am not even making anything but working to try to support my family of 5 they really need reconsider and get it passed for the bankruptcy law on student loans im close to 90,000 in debt i will never enjoy owning a house or even getting a car loan anymore its sad but college shouldn’t be this expensive i hope that my kids find better way to go to college all i am doing is writing this to maybe help others to speak out and maybe something will get done if not me and my family wont make it we will prob be on the streets

  • The Mallard

    This is an unfair practice, and I think we should all get together and file a class action lawsuit. This practice is damaging the lives of every student who was sold a bill of goods by the adminisions representative about the kind of jobs that are out there and the pay they might be making. This practice is harmful as now employeers are looking at credit scores, and does the Federal government when applying for jobs. I’ll sign the petition.

    • http://www.credit.com/ Credit.com Credit Experts

      To make change, voices have to be heard. For this reason, we encourage anyone who feels passionately about the issue to write their elected officials — congressmen, senators, lawmakers, etc. One other option to consider is filing a complaint directly with the CFPB.

      Last year the Consumer Financial Protection Bureau opened their doors, asking for submissions from consumers with student loan issues. They want to hear from you, whether it’s for questions, complaints, or to share your own personal story.

      You submit directly through their complaint system online here: http://www.consumerfinance.gov/complaint

      Or you an call them directly, toll-free at 1-855-411-CFPB

      To find out more, you can also visit: CFPB: Student Loan Complaint System is Open for Business

      One small clarification on the argument, however — credit reports are used for employment screening purposes, but credit scores are not. This is a common misconception that’s exacerbated by online, print and broadcast media that interchange the two terms as though they are one and the same. You can read more about this topic here if you’re interested:

      Will an Employer Credit Check Hurt Your Score?

    • stacy

      How insightful..I went back to school for teaching because of all the promises and incentives. Although I love my job and I am very thankful that I have a job I am 67000 dollars in debt and don’t see any way out. I have tried finding all of the incentives that were promised prior to be returning to school..unfortunately none exist. Like I stated I love my job but it doesn’t pay enough for me to repay my debt.

  • http://www.credit.com/ Credit.com Credit Experts

    If the debts were included prior to the bankruptcy laws changing (which it sounds as though they were), it would def. be worth getting legal advice — either the bankruptcy attorney you used when you initially filed or a consumer law attorney. If the bankruptcy attorney you used when you filed is still available, they should have access to your filing records which may make this a little easier to sort out and address. If not, it may even be worth consulting with a consumer law attorney for help — especially if you’ve been paying a collection agency on a debt that you don’t owe. To find a consumer law attorney in your area, http://www.NACA.net is a great resource.

  • http://www.Credit.com/ Gerri Detweiler

    Two things I would suggest. One is to contact a consumer law attorney to find out whether you have any recourse. One source to find an attorney experienced in student loan issues is TheStudentLoanLawyer.com, and another is NACA.net.

    If they can’t help at least file a complaint with the Consumer Financial Protection Bureau.

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