The majority of student loans are either guaranteed by or issued directly from the federal government. The rules on their dischargeability are a little confusing: They are dischargeable if the debtor can show that paying them would constitute an “undue hardship,” which is defined differently by federal appellate courts. Fortunately, federal student debtors can avail themselves of hardship deferments, hardship discharges, and the Income-Based Repayment program if they run into financial hardship. Private student loans require the debtor to pass the same “undue hardship” standard, but lenders rarely offer the same options that the federal government does.
Recently, legislators in Congress have proposed changes to the law that would allow student loans full dischargeability as they had before 2005. However, many lenders disagree, and the CEO of Invite Education, LLC published an opinion piece in U.S. News disagreeing with any changes to the treatment of private student loans under current law. Here are a few claims he makes that are not correct:
- The main argument is self contradictory: “Turning bankruptcy courts into turnstiles for the discharge of the least common form of student loan debt may temporarily assist some distressed borrowers, but the overwhelming majority will not be helped.” If only “some distressed borrowers” will use the bankruptcy system to discharge their student loans, then the courts cannot be “turnstiles.” Why the assistance would be “temporary” is also unclear, and why the law must help the “overwhelming majority” is irrelevant. Many private student loan debtors have no option for dealing with their student loans, it doesn’t matter how few they are in number.
- Filing bankruptcy is not “a 10-year stain on their credit profile that makes other borrowing virtually impossible.” This is a common fear pushed onto debtors. Banks will lend to people who have filed bankruptcy, sometimes too eagerly even since they cannot use Chapter 7 again for eight years. Banks are less likely to lend to people who have defaulted on their loans and could not discharge them in bankruptcy.
- “Another unintended consequence is a likely increase in the cost of debt for private student loan borrowers.” Response: If higher interest rates deter people from taking out loans, then they probably shouldn’t be going to college because it won’t help them repay their loans.
- “Some policymakers seek to strip non-dischargeability from private loans while maintaining it for federal loans. Decoupling identical bankruptcy protections will create confusion for borrowers.” Although it’s probably best to restore the bankruptcy protections to both types of debts, given that federal loans provide more protections than private loans do, this is not a serious argument.
- “[T]he Federal Reserve Bank of New York recently reported that credit underwritten private loans account for only 7 percent of annual loan volume. The remaining 93 percent are made by the government and are not credit tested.” The federal government should do more to underwrite its loans, but that doesn’t mean private loans should be nondischargeable.
- “[P]rivate loans are dischargeable today. Under current law, private student loans may be discharged when borrowers demonstrate economic hardship. The bar for judges to grant economic hardship and discharge is rightfully high to protect borrowers from the moral hazards and negative consequences of bankruptcy early in their lives as independent consumers.” The “undue hardship” tests are not standardized and they are not clear-cut. Some boil down to the bankruptcy judge’s whims, and the moral hazard of bankruptcy pales to the moral hazard of irresponsible lending.
It’s disappointing that the Private Student Loan Bankruptcy Fairness Act and its companion Fairness for Struggling Students Act are not moving quickly through Congress. Until then, bankruptcy can help people who are dealing with private student loans, such as discharging consumer debts to free up payments for student loans.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney for a free initial consultation. Call us at 1-702-880-5554 to set up your free consultation.