Bankruptcy Protection For Students?

In 2005 congress changed the law to exclude student loans (private or public) from bankruptcy protection, meaning that it is almost impossible to discharge your student loan by filing for bankruptcy.

Now, in light of the recent student lending scandal, congress is taking another look at that law, and legislation has been introduced that would extend some measure of protection to students who borrowed from private or non-profit lenders.

From Credit Slips:

Senator Dick Durbin made what appears to have been the first response to these hearings. He has introduced S. 1561. Under Senator Durbin’s legislation, only student loans “made, insured, or guaranteed” by a governmental unit would be nondischargeable in bankruptcy (absent a finding of undue hardship). The legislation would allow loans from private or nonprofit lenders to be dischargeable in bankruptcy. The discharge of loans from nonprofit student loan lenders would be a change from the pre-2005 law and was prompted, as I understand it, from reports that for-profit private lenders were sometimes working through nonprofit organizations. Also, as I read the legislation, it would make loans from state, but not private, universities and colleges nondischargeable.

Good news for some of our readers who have had a lot of trouble with private loans. There are people literally living off the grid, hiding from student lenders because they can’t make enough money to make their payments. It’s scary! —MEGHANN MARCO

Rolling Back The 2005 Law On Student Loans [Credit Slips]
(Photo: aprilandrandy)

Comments

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  1. D28 says:

    I really hope policy makers (and students!) start paying attention to the state of affairs with private loans. Unfortunately, private loans confer a lot less “stability” than federally-subsidized loans.

    I usually share this article with friends when this topic comes up: http://www.thenation.com/doc/20060327/vonhoffman

  2. IndyJaws says:

    We’re supposed to pity people who are hiding from creditors for a valid debt? Unless there are videotaped highlights of the gun to their head when they accepted the student loans, why should this be any different than someone who racks up thousands in credit card debt?

  3. TechnoDestructo says:

    Bout damn time.

    You know, if student lenders had just BEHAVED THEMSELVES they wouldn’t be staring down the barrel of re-regulation.

    They could have in the long term made more money if they just hadn’t gotten greedy.

  4. gorckat says:

    My wife’s loans (~50k) are deferrable until she makes enough to start paying them off. The payments would be ~$700/month. Right now we can’t swing it.

    If she had re-fied, she wouldn’t be able to defer any longer (or at least for a finite time) and that wasn’t clearly conveyed when she was 90% done with a re-fi. The company/gov’t cleared her up on that before she signed, thankfully.

    To my understanding, that is the big deal and why we pity people living off the grid.

  5. Seth_Went_to_the_Bank says:

    “We’re supposed to pity people who are hiding from creditors for a valid debt…Why should this be any different than someone who racks up thousands in credit card debt?”

    Actually, it shouldn’t be any different. Most credit card debt is dischargable in bankruptcy. And it should be the same for private student loans.

  6. Optimistic Prime says:

    @Seth_Went_to_the_Bank: Seth beat me to it, student loans should be treated the same as any other debt.

  7. ThatDon'tFazeMeBro says:

    Ahh, good ol’ UVA (the Rotunda’s pictured alongside the post).

    (To the tune of Auld Lang Syne)
    That Good Old Song of Wahoo-wa,
    We’ll sing it o’er and o’er.
    It cheers our heart and indebts us all
    By the end of our year four.

    I graduated from UVA last year and am indebted to the government. Although I paying the loans off month by month right now, I find it quite interesting that student loans may get preferential treatment in bankruptcy court.

  8. TechnoDestructo says:

    @IndyJaws:

    The difference is you take out student loans in anticipation of the income you will make as a result of the education that you took out those loans for.

    Sometimes that income never comes despite one’s best efforts.

  9. josh1701 says:

    Here are a few choice excerpts from today’s Chronicle of Higher Education article (may be password protected) about the issue:

    “Congress tightened up bankruptcy requirements for student borrowers two years ago at the urging of lenders such as Sallie Mae, the nation’s largest provider of student loans.

    “In a December 2005 political strategy document, Sallie Mae listed protecting the change as one of the company’s key lobbying objectives.”

    and

    “A spokesman for the Consumer Bankers Association, which represents a variety of the nation’s largest student lenders, declined to take a definite position on Mr. Durbin’s proposal.

    “The lenders encouraged Congress to reduce the bankruptcy protections for student borrowers in 2005 “under the belief that limiting loan losses would result in lower interest rates and broader access to loans by students,” said John Dean, special counsel to the bankers’ association.

    “It’s not clear from any known lending statistics whether that theory has been proven correct in the two years since the law was changed, Mr. Dean said.”

    Finally,

    “Mr. Durbin has argued that borrowers who default on student loans now get less bankruptcy protection under federal law than those who default on loans for purchases such as cars or furniture.

    “One banking industry official, who declined to be identified, agreed there may be a legitimate argument that student lending has a greater value to society than other types of lending and that the borrower therefore should enjoy greater protection.

    “Any attempt to change the bankruptcy law could become politically complicated, however, as lawmakers with interests in other forms of borrowing seek to improve consumer protection in those areas, the official said.”

  10. cde says:

    @IndyJaws: Nowadays, not going to A Uni and having a gun to your head are pretty much the same thing.

  11. Jiminy Christmas says:

    Whoever said “Education is its own reward.” obviously didn’t have $25K in student loans to pay off. So much for the love of learning. Though I guess they can’t repossess your degree. However, from what I recall regarding federal student loans, they can garnish up to 30% of your gross income if you default.

    Yes, college freshmen are adults but I really do think they were thrown to the wolves. First, I would like to note that over the past decade or so Congress (controlled by the GOP 1994-2006) made a conscious decision to limit the amount of money available for Federal Direct Loans, thereby steering students to private lenders. I got through undergrad with Guaranteed Student Loans (paid around 8% interest) and grad school with Direct Loans at about 6.25% and never had to seek private financing. I don’t see why students today can’t go to school on the same terms I did.

    The NYT had an article this past week about private lenders of student loans. Students are commonly paying 10%-15% interest or more on these. Some loans have characteristics of subprime mortgages, like penalties for refinancing or early repayment. And all along the schools themselves were steering students to these “preferred” lenders. I don’t blame the students for getting taken in, even though they did sign the promissory notes. How many of us grownups can really understand all the crap we signed when we bought a house, or what the certificate of coverage for our health insurance really means?

  12. zolielo says:

    Pay all of your loans. No entitlement, mercy, or whatnot. If one does not understand do not sign.

  13. lhm says:

    I’ve taught college on-and-off, and have noticed that tuition costs and the strain it places on students means love-of-learning is mostly a thing of the past. I’m not sure if that’s true at Amherst, but it’s true in smaller colleges.

    I’ve had students angry at me for giving them poor grades for shoddy work, and then they tell me the extra jobs they have to take to pay for school, the shifts they work… Some have children. They just don’t care about learning. They want the degree because it’s a necessary hurdle. That’s all.

    Even those who start out with a love of learning, most lose it soon.

  14. IndyJaws says:

    @TechnoDestructo

    I definitely agree. My problem is with the borrowers who either A) Borrow far more than the cost of their education because they don’t want to work and go to school at the same time, or B) Go tens (or hundreds) of thousands of dollars into debt for a course of study that would never allow them to earn enough money to repay the loans once they get into the “real world.” When I see someone attend a private school like Le Cordon Bleu and rack up $50k+ in loans when there’s about, what, a 2% chance they’ll ever be successful enough to realistically be able to pay off the loan in any remotely reasonable time, I really have to question their decision making. Yet, they’re the ones who are complaining while slaving away as a sous chef for 25 grand a year. Our neighbor wants to go out of state to study journalism. So they’re going to drop over $100k on a profession that probably won’t pay them squat. Don’t get me wrong…I 100% agree with following your dreams, but you have to be realistic as well.

  15. Seth_Went_to_the_Bank says:

    Not everyone can afford to get a college education. Years ago, there was considerably more aid provided by the federal government in the form of grants. College educations are a good investment for the taxpayers. Better jobs, better pay, better consumers, better taxpayers.

    Today’s system is about a free for all for corporations to make money. You num nuts that are so easily manipulated into the ol’ divide and conquer – they convince you that some people are not paying their student loans while CEOs rip off billions and laugh all the way to the bank. They get you to attack some poor sod who is unemployed while the executives are cashing in.

    Dumb dumb dumb.

  16. StudentLoanGuy says:

    This is ridiculous. I work for a student lender whose volumes are down, and the delinquency and default rates on private loans are atrocious. There are plenty of people who, despite a wide range of options including graduated payment plans and deferment and forbearance options, simply roll right out of school and into default. They borrow thousands of dollars to attend school and then never make a payment, seemingly never intending to.

    You think student lenders want you to default? Servicers like ACS will bend over backwards to take payments from you, and we won’t declare you defaulted if you make *any* payments within *any* 180-day period. Pick up the phone, call your lender, and work something out. This isn’t rocket science.

    I have student loans of my own. I consolidated them, took advantage of my grace period to find a job, signed up for ACH withdrawals, and don’t live beyond my means. Now I contribute to a 401(k) as well. Why is this so difficult to do? Do you know what the take rates on ACH options are? Even with a 25 or 50bps reduction, they’re under 15%! The take rates on rebates or reductions after 9-48 on-time payments, depending on the lender? Often under 5%. I’m sorry for saying so, but frankly it’s a bit a pathetic.

    And for the commenter above who said that his wife’s ~$55k in FFELP debt comes out to a $700/month payment, he’s just talking out his rear. A FFELP consolidation loan today will not exceed 8% and will likely be under 7%, with a repayment period of 15-20 years. Try this function in Excel: =PMT(.08/12,180,55000). The answer is $525.61, and if that’s the best consolidation rate you can get, I’d be astounded.

  17. jojo400jk says:

    I just read this last response from student loan guy. I know he wrote this six months ago, but i am writing to say he is wrong. I recently consolidated my private student loans which total around $42,000.00 ACS is the current lender and my interest rate is 10.75% and my payment is $407.00 for 30 years. That will cost me almost $150,000.00 to pay back. This is almost 5 times the original amount i borrowed $32,000.00.My credit rating the last time i checked was over 700 so my credit is pretty good. If anyone does know of someone with better rates i would appreciate you letting me know.

  18. Brianwa says:

    I’ve paid back all of what I originally borrowed, but I still owe even more than that because of the predatory practices Congress has allowed. The only reason I’m not homeless right now is because I filed a Chapter 13 repayment plan. As it is, I can’t afford to buy any form of real estate, have a family, or even go on a vacation.

    Yes, IndyJaws, there’s good reason to pity those who are living off the grid. Private enterprise is one thing; raw greed is another. There’s no shortage of that at most student loan lending companies.