Sen. Dick Durbin (D-Ill.) thinks Congress should change the law to allow borrowers to have their debt from private student loans wiped clean when filing bankruptcy.
On March 20, a Senate judiciary subcommittee heard testimony about student debt and bankruptcy. Federal student loans have been ineligible for discharge when filing bankruptcy for two decades. However, it was only in 2005 that a law was passed to ban private student loans from bankruptcy discharge.
"There is no reason why private student loans should get treated differently from other private debt in bankruptcy," Durbin said in remarks at the hearing. "And it is especially egregious that these private loans are non-dischargeable in cases where a student was steered into the loan while the student was eligible for safer federal loans."
Durbin also said the 2005 provision to make private student loans ineligible for bankruptcy discharge is "a mystery amendment. We can’t find out who offered it."
Deanne Loonin, an attorney for the National Consumer Law Center, testified that the law was passed assuming there would be abuse by borrowers.
"Current bankruptcy law treats students who face financial distress the same severe way as people who are trying to discharge child support debts, alimony, overdue taxes and criminal fines," Loonin said in her testimony. "Yet there is no evidence and has never been any evidence to support this assumption."
Durbin introduced legislation in 2011 to allow private student loans to be eligible for discharge in bankruptcy.
The argument against it, is that when having a $20,000 loan from a private lender for a car being discharged in bankruptcy, the car could be confiscated. Yet, discharging $20,000 in student debt does not allow anyone to take away a borrower's education. Other observers note that student loans operate in a very different way than credit card debt.
"The initial loan balances are much larger than they are with cards, for starters," writes Thomas K. Brown on the blog iStockanalyst. "And the borrower doesn't begin to repay them until he's earned his degree, four years hence. The lender thus has no idea which of its credits are good and which are bad until it has already loaned them, in many cases, tens of thousands of dollars."
Student loan debt is a significant issue nationwide, so what else is Congress doing about it? Take a look at 8 ways they are grappling with the problem:
Pell grants are the financial aid packages given to low-income college students which they do not have to pay back. Students who receive them are not required to attend a public college or even stay in their homestate, so that freedom has made it a fairly popular program. However, Rep. Paul Ryan's proposed federal budget would cut $200 million from the program, and potentially eliminate help for more than 1 million students. Currently the maximum Pell grant award is $5,645, which only covers about a third of the cost of attending college. Ryan's budget would cut Pell grant eligibility for students who attend classes on less than halftime. His budget would also make it so college students with federal student loans would have to start paying interest on their loans while still in school.
Thanks to the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005, virtually no student loans can be discharged in bankruptcy. So in practical terms, if you have $200,000 in debt for credit cards, car payments, or mortgage payments from a private bank, they can all be wiped away in bankruptcy. However, student loans from the same private lender cannot. The argument is that you can take away someone's car when they file bankruptcy, but you cannot take away their education. The Senate heard testimony on March 20 about whether or not this should be changed. Sen. Dick Durbin (D-Ill.) is leading the charge for bankruptcy reform that would allow students to get rid of their student loan debt when and if they file bankruptcy.
HuffPost Detroit reported on the Student Loan Forgiveness Act, put forward by Rep. Hansen Clarke (D-Mich.): H.R. 4170 would forgive student loan debt for those who have paid 10 percent of their discretionary income toward their loans for 10 years and would cap interest on federal student loans at the current rate of 3.4 percent. Individuals who go into teaching, public service or practice medicine in underserved areas would have their debt forgiven after only five years. "Everyone tells us to go to school and work hard and we'll be rewarded for our dedication," Clarke said. "But the promise of a dream can turn into a nightmare for so many people."
An online petition hosted by MoveOn.org has nearly reached its goal of attaining 875,000 signatures in support of the Student Loan Forgiveness Act. The Forgiveness Act would allow students who make payments equal to 10% of their discretionary income for 10 years to have their remaining federal student loan debt forgiven. According to talking points included in the petition, "If you have already been making payments on your student loans, your repayment period would likely be shorter than 10 years. The amount you have already paid on your student loans over the past decade would be credited toward meeting the requirement for forgiveness."
A 2007 law that kept federally subsidized Stafford loan interest rates low will expire this summer, meaning the rates would double from 3.4 to 6.8 percent. Students have already gone to Capitol Hill to protest and most Democrats are in favor of keeping the interest rates low. Sen. Jack Reed (D-R.I.) and Rep. Joe Courtney (D-Conn.) proposed a bill that would get rid of the expiration date on the discounted student loan rate. However, Republicans argue it would cost the federal government $5.7 billion, which they say is way too much. If Congress does not act, the interest rates for federal student loans would increase on June 30, 2012.
Republicans passed a bill out of committee that would repeal minimum standards for a credit hour and removes the need for a state to authorize higher education institutions in their state. Rep. Virginia Foxx (R-N.C.) contends this would allow greater flexibility for schools, Democrats counter that it opens the door for fraud. The federal definition of a credit hour is the basic unit underlying the distribution of federal student aid. Rep. Tim Bishop (D-N.Y.) wrote on Inside Higher Ed that the bill represents a threat to the government's ability to police institutional fraud in the higher education industry. In regards to eliminating the requirement for state authorization for colleges, Bishop said "the bill would make it impossible for states to guarantee the quality of programs operating inside their borders."
A rule from the Obama administration will limit the use of Pell grants to 12 full-time semesters, or approximately six years of studying. The new rule goes into effect July 1, and the Department of Education will contact students in April who have used up their allotted time in school.
Congressional Republicans recently sent a letter to the Government Accountability Office urging them to investigate the federal student loan program and whether they are "appropriately managing student debt." The federal government has turned to private debt collectors to collect money owed for student loans, while $67 billion of student loans are now in default, according to Businessweek. Those contractors out there trying to get students and graduates to pay up are paid on commission. The GOP letter said they were concerned borrowers who have defaulted are not getting adequate assistance to get back on track repaying their loans. The letter was signed by Rep. John Kline of Minnesota, chair of the House education committee; Sen. Michael Enzi of Wyoming, the ranking member of the Senate education committee; Reps. Virginia Foxx of North Carolina and Judy Biggert of Illinois; and Sens. Lamar Alexander of Tennessee and Tom Coburn of Oklahoma
The newly created Consumer Financial Protection Bureau said it will field complaints about billing, confusing advertising and collection by private student lenders, and relay complaints about federal loans. "Getting a higher education can mean taking on significant debt - a big decision with a lot of consequences," said CFPB Director Richard Cordray. It's safe to say the CFPB is pretty concerned about student debt among American college students. Rohit Chopra, the student loan ombudsman for the CFPB, had a grim forecast recently in a blog post about student debt: "Students continue to borrow private student loans, which lack the income-based repayment and deferment options of federal student loans. If current trends continue, there will be consequences not just for young people, but for all of us."
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