Bankruptcy

Yesterday, Sen. Barack Obama (D-Ill.) unveiled plans to rewrite federal bankruptcy laws to make it easier for financially-strapped senior citizens, military families, and individuals suffering medical emergencies to get relief from debilitating debts. While we are pleased that the presumptive Democratic presidential nominee is proposing to overhaul the 2005 bankruptcy bill, which was a glaring example of politicians putting corporate interests over regular people, we urge him not to forget another group who desperately needs help -- borrowers who have taken on unmanageable levels of private student debt and now find themselves in severe financial distress.

As we have noted previously, Congress tucked a provision into that bankruptcy bill making it extremely difficult for borrowers to discharge private student loans. That special provision was added in a secret conference committee, without any public debate or notice.

For most unsecured debt, a borrower who runs into difficulty can file for Chapter 7 liquidation or Chapter 13 reorganization, so a judge can sort out the appropriate treatment of various loans. But there is a short list of debts that the law subjects to a different status, allowing discharge in only the most extreme circumstances. The government, for example, makes it nearly impossible for people to escape child support responsibilities, overdue taxes, and criminal fines.

Federal student loans also can't be discharged. There's at least some justification for providing federal loans that status since they are backed by taxpayer dollars and come with borrower protections in cases of economic hardship, unemployment, death, and disability. But there is no good reason for private loans to be accorded the harshest bankruptcy status.

“I work to live.”

So goes the beginning of a quote by a mid-20s woman who was interviewed for a recent Washington Post piece on bankruptcy.

The front-page, above-the-fold-article described the growing number of working Americans seeking relief from unmanageable debt by filing for bankruptcy. As my eyes traveled across the page, my head nodded in agreement with the author’s points. Elizabeth Warren describes the economic tightrope that middle class households walk not as a recent, post-credit crisis phenomena, but as a reflection of the economic risk and instability of this generation (see her 2006 Harvard Magazine piece). Personal bankruptcies filings are on the rise, despite the recent change requiring debtors to meet more stringent criteria in order to file. And then, the ever-important point that bankruptcy wreaks havoc on one’s credit (in case any cynical readers viewed chapters 7 or 13 as an easy “out” for those struggling financially).

At Higher Ed Watch, we hear regularly from financially-distressed borrowers with private student loans who believe they have been victimized by lenders' predatory practices. Much of that feedback comes in the way comments we continue to receive on blog posts that ran more than a year ago.

At a time when the federal government is providing a major bailout of the student loan industry, we think it is important to highlight the experiences of borrowers who are struggling with unmanageable levels of high-cost, private student loan debt. Surely borrowers such as these could use a helping hand too.

After Tuesday's surprisingly one-sided hearing before the Senate Banking Committee on the credit crunch, it's clear that Congress is prepared to take steps to add liquidity to the student loan marketplace. But as lawmakers move forward with plans to bailout student loan giants like Sallie Mae, they shouldn't forget about the financially-distressed borrowers who have been victimized by the lenders' predatory private loan practices. Surely, they deserve a helping hand too.

Over the last two years, we at Higher Ed Watch have written extensively about how loan companies' aggressive marketing practices and cozy relationships with colleges have pushed students to take on unnecessarily high levels of expensive private student-loan debt, often before they have exhausted their lower-cost federal loan eligibility. In fact, at least one in five private student loan borrowers take out a private loan before they exhaust safer, cheaper federal Stafford loan options.

Yesterday, we took issue with arguments made by a key lawmaker who helped defeat a measure in the U.S. House of Representatives that would have allowed financially-distressed borrowers to discharge their private loan debt in bankruptcy.

In attacking the proposed amendment to the House Higher Education Act reauthorization legislation, Rep. Ric Keller of Florida, the ranking Republican on the House subcommitee on higher education, said that "the current system" offers borrowers who find themselves in dire straits with all of the relief they need. He argued that struggling borrowers can work with private loan providers to obtain "more flexible" repayment options. He also noted that private loan borrowers who demonstrate that repaying their loans would cause "undue financial hardship" can have their loans discharged in bankruptcy.

"The Bankruptcy Code," Keller said, "already provides a provision for undue hardship for those people who truly need it."

The U.S. House of Representatives delivered a body blow to financially-distressed student-loan borrowers earlier this month when it voted down an amendment to a key higher education bill that would have allowed private student loans to be dischargeable in bankruptcy. Overall, the amendment, sponsored by Rep. Danny Davis (D-IL), failed by a vote of 179 to 236, with nine Republicans supporting the measure and 52 Democrats opposing it. But some very strange arguments were made.

In attacking the Davis amendment, Rep. Ric Keller of Florida, the ranking Republican on the House subcommittee on education, expressed sympathy for those who find themselves in dire straits and can't repay their loans. But then he argued that "the current system" offers them all the relief they need:

"Now what is a better way? The better way is the current system. You get out of school, you've got 10 years to make your payment, and if you can't make it, you work with the lenders for more flexible options, let you pay over 25 years. The Bankruptcy Code already provides a provision for undue hardship for those people who truly need it." 

The U.S. House of Representatives has a chance today to provide much-needed relief to low-income and minority students who have fallen victim to predatory private student loan practices by Sallie Mae and other lenders.

House Members will vote on an amendment, sponsored by Rep. Danny Davis (D-IL), that would reverse a 2005 law making it virtually impossible for borrowers who are in financial distress to discharge private student loans in bankruptcy.

The leaders of the House Committee on Education and Labor introduced legislation on Friday that would go a long way in addressing consumer advocates' biggest concerns regarding private student loans. The Higher Education Act reauthorization bill would, for instance, bar colleges and lenders from making

Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.

In 2005, Congress tucked into the bankruptcy bill a provision making it virtually impossible for borrowers to discharge private student loans. That provision -- which was added in a secret conference committee, received no public debate, and had no named Congressional sponsor --represents a glaring example of politicians serving corporate interests over regular people.

Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.

House Committee Embraces New America's Loan Auction Proposal

The House Education and Labor Committee has embraced the New America Foundation's proposal to use an auction mechanism to set student loan subsidies. The Committee unanimously adopted…

Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.