Discharge of Student Loans In Bankruptcy:
How Obama And The Senate Democrats Proposed Bill Is Much Ado About Nothing
Part III in Series By Jay Weller
Recently, upon inspiration from President Obama and his Student Bill of Rights, as implemented by Executive Order, a number of Senators in Congress have introduced a Bill called the Fairness For Struggling Students Act of 2015.
The main sponsor of the Bill, Illinois Senator Dick Durbin, was joined by his co-sponsors of the Bill, including Mazie Hirono of Hawaii, Kirsten Gillibrand of NY, Brian Schatz of Hawaii, Tim Kaine of Virginia, Barbara Boxer of California, Ron Wyden of Oregon, Elizabeth Warren of Massachusetts, Jack Reed of Rhode Island, Patty Murray of Washington, Richard Blumenthal of Connecticut, Al Franken of Minnesota, and Sheldon Whitehouse of Rhode Island.
Mr Durbin issued a statement that “Too many Americans are carrying around mortgage-sized student loan debt that forces them to put off major life decisions like buying a home or starting a family”. Durbin continues, “It’s not only young people facing this crisis, it is parents, siblings and even grandparents who co-signed private loans long ago and are still making payments later. Its time for action. We can no longer sit by while this student debt bomb keeps ticking”.
According to Durbin, recipients of Student Loans now owe approximately $165 billion in private Student Loans.
Mr Obama , preceding Durbin’s Bill, writes in his President’s memorandum, Student Bill or Rights:
College remains an excellent investment, and student loans enable many who could not otherwise do so to access further education. However, there is more work to do to help student repay their loans responsibly. In 2013, college graduates owed an average of $28,500 in Federal and private loans. More than one in eight Federal borrowers default on their loans within three years of leaving school. My Administration has already put in place significant protections that ensure borrowers with credit cards and mortgages are treated fairly. We can and should do much more to give students affordable ways to meet their obligations and repay their loans.
This writer’s understanding of the legislation proposed by the twelve Senators is that the new Law would Amend the existing Bankruptcy Code, permitting private student loans to be Discharged in Bankruptcy.
The Christian Science Monitor, reacted that the eventual success of the Bill is uncertain, as the Democrat sponsors of the Bill are now members of a Republican controlled Senate.
Fortune Magazine further states, that even if the Bill is able to become Law in a Republican controlled Congress, and permits Private Student Loans to be Discharged in Bankruptcy, such private loans only comprise about 10% of Student Loans. The remaining 90% of Student Loans would not be eligible to be Discharged in Bankruptcy.
The Consumer Financial Protection Bureau holds that Student Loan Debt totals about 1.2 Trillion Dollars, which is more than is owed on credit cards and automobile loans, in the United States.
The Wall Street Journal writes that total Student Loan debt has more than doubled since 2007 and almost 25% of Student Loan borrowers are behind on their payments.
The Consumer Bankers Association, which according to the Wall Street Journal, is the lending industry’s main trade group, stated that less than 3% of borrowers of Private Student Loans are in “financial distress”.
It appears that the default rate on Private Student Loans is much lower than the Default Rate on Federal Student Loans. A truly Private Student Loan, unlike a Federal Student Loan, is likely granted based upon a borrower’s credit score, collateral, and other factors, such as the likelihood that the borrower’s chosen area of study will result in gainful employment.
Federal Student Loans are based upon none of those things. One can obtain a Federal Student Loan with equal ease, whether he chooses to study Sociology or Engineering.
Even in the unlikely event, such a Bill is passed by Congress, allowing Private Student Loans to be Dischargeable in Bankruptcy, will do very little in terms of alleviating the debt burdens of the great majority of those who have Student Loans Debt. A truly Private Student Loan is an extremely rare occurrence, and it appears that Defaults on Private Student Loans are much lower than Federal or Non Private Student Loans.
Either Mr Durbin and his Senate co-sponsors are entirely clueless when they claim this ill conceived legislation will alleviate Student Loan Debt or avoid a Student Loan debt bubble, or they are simply attempting to pander to uninformed elements of the population for political gain.
The next Article in our Series on Student Loans will examine the various court cases that define Undue Hardship, in the Bankruptcy Courts, the District Courts, and the Supreme Court.