Bankruptcy Lawyer | Student Loan Debt and Bankruptcy Law Changing (Pt. 1)

Bankruptcy Lawyer | Student Loan Debt and Bankruptcy Law Changing (Pt. 1)

Bankruptcy Lawyer | Currently, Federal law prohibits student loan debt from being discharged during bankruptcy. But that may be changing.

Potential Changes for Student Loan Debt

Sounds like the White House is currently weighing steps that would make it easier for Americans with student loan debt to discharge certain debt during bankruptcy proceedings. This would essentially make privately held student loan debt similar to credit-card debt and mortgages.

Currently, that is not the case. Right now Federal law prohibits student loans that have been issued by private lenders and the U.S. government, from being wiped out during bankruptcy, unless rare circumstances exist. Bottom line is that it’s harder to expunge student loan debts during bankruptcy than it is to discharge lines of credit such as mortgages, credit-card balances and auto loans.

President Obama

Recently, President Barack Obama directed administration officials to study whether bankruptcy options should be available for “all student loan borrowers.” This review, according to an administration official, will most likely focus on whether bankruptcy options should be expanded for borrowers that have student loans issued by private lenders – such as Sallie Mae and Wells Fargo. These lenders are not backed by the government.

Breakdown of Student Loan Lenders

Private loans, made by a lender such as a bank, credit union, state agency, or a school, make up about 10% of all student loans. The remaining 90% are held by the federal government.

Federal student loans offer many benefits, including fixed interest rates and income-based repayment plans, that are not often offered with private loans. Private loans also tend to be more expensive than federal student loans.

The Road to Change

Any changes to bankruptcy law would have to be approved by the Republican-controlled Congress. That Congress broadly opposed the president’s agenda.

The government is also expanding programs that lower student’s monthly payments while also ultimately forgiving some debt. Meanwhile, the lending industry has held on to the argument that loosening student-loan rules would ultimately drive up borrowing costs for everyone, because lenders, in an attempt to make up for lost money due to bankruptcy discharge as well as future loses because of bankruptcy, would need to raise rates.

Student Loan Debt Rising

Since 2007, total student debt has more than doubled. Federal Reserve data show that nearly a quarter of borrowers out of school now are behind on payments. The average burden  among recent college grads is just under $30,000 —a small but growing share owe substantially more than that. While a good portion of those borrowers are graduate students that are bringing in decent incomes, a lot of those in debt are those who make modest to no salaries. And many of those stuck on the hook for paying back the loans are the parents who co-signed.

Borrowers who filed for bankruptcy in 2013 had an average of $32,096 in student-loan debt. That’s compared with the average of $13,456 for those who filed in 2006, according to figures recorded by Northeastern University professor Daniel Austin.

“We’re trying to make sure that across the board, more and more young people can afford to go to college, and then afterward, aren’t so burdened with debt that you can’t do anything else,” President Obama said at Georgia Institute of Technology.

Less Than 3%

The Consumer Bankers Association, which is the lending industry’s main trade group, has said that less than 3% of Americans with private student loans are in “financial distress.”

“We are working to provide flexible repayment options to keep them from finding themselves in bankruptcy at all,” the group said.

Larger Initiative

This effort is part of a larger initiative by the White House that includes setting up a system that will allow borrowers to register their complaints about the loan servicers that collect loan-payments on behalf of the government. Servicers would face more federal oversight and new rules in an effort to make them more proactive when reaching out to distressed borrowers. This initiative would also work to set up better repayment terms. – Simone Resnik

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