Michelle Singletary at the Washington Post has an excellent column today about how students can be trapped in private student loans with no way out.
She writes:
She writes:
"This was not a decision I made lightly," [Valisha Cooks] said. "Filing for bankruptcy was expensive and, most of all, humiliating. I was raised to work hard, pay my bills and be responsible." About $10,000 in other debt was erased. But not her student loans.Chairman Miller agrees with Ms. Singletary, which is why he's called for Congress to end special treatment for private student loan providers. "In 2008, the Democratic Congress took important steps to provide long overdue consumer protections for students when borrowing financially risky private student loans, but more needs to be done. Private student loans remain far more expensive for borrowers than federal student loans, and often carry tricky terms and conditions. Especially in this economy, private student loan borrowers deserve the same basic protections consumers receive when using their credit cards, buying a car, or paying their electric bill."
"Now, even though I have a good job, I can't afford to pay all my bills in any one month," Cooks told the [House Judiciary] subcommittee. "I go to food banks to feed my son, and I will never be able to afford a house." Like child support and tax debt, student loans are nearly impossible to eliminate in bankruptcy. You have to prove "undue hardship." That's a high hurdle to jump.
Before, the only loans that couldn't be canceled by filing for bankruptcy were federally backed student loans, as well as loans where nearly all the funds came from a nonprofit institution, according the National Association of Student Financial Aid Administrators. In the case of the federal loans, this made sense. The government backs the loans, and defaults are a direct hit to the federal budget, meaning we all pay for those who can't.
But in 2005, during a major overhaul of the bankruptcy code, private student loans were given an elevated status and thus couldn't be discharged. This didn't make sense. If we are going to have a fair bankruptcy system, private education loans should be treated the same as other private consumer debt. That's the risk lenders take, similar to the risk borne by providers of loans for cars, homes or other consumer purchases.
Lenders and opponents of this legislation argue that if people can erase their education debt, private loans for college will be tougher to qualify for and harder to get. There's a concern that people will get an education and immediately run to bankruptcy court to shed their loan obligations before they make big money.
I covered bankruptcy for years, and seldom did I see bankruptcy petitioners gleefully sitting in the corridors of a courthouse eagerly waiting to shirk their financial responsibility. People usually seek bankruptcy protection as a last resort. Besides, there is a test in place to prevent people from scamming the system.
