Bankruptcy Law and Student Loans. Interesting article that I feel is informative to those facing mounting educational loan debt.
The president and I don’t agree on many things. However, he is right about student loans and bankruptcy.
This debt should not be an albatross around [student] necks for the rest of their lives,? he said. And he is absolutely correct.
It is difficult, if not nearly impossible, right now to to add a student loan to Chapter 7 or Chapter 13 personal bankruptcy actions.
To do so, one must show “undue hardship,” a financial burden that is so extreme that even the solutions available will not ease the suffering of those carrying this loan.
According to the Columbus, Georgia’s Ledger-Enquirer: “(B)orrowers graduating in 2016 are burdened with an average of $37,172 in loans to repay over the course of their lifetime. Some borrowers who take out student-loan debt to complete higher-degree programs are apt to have two to three times more in outstanding loans ? a financial burden that is hard to champion even when no other consumer debt is owed.”
It is not unusual for a student with a graduate degree to have at least $100,000 in loans to start repaying a few months after graduation.
Several proposals are before U.S. Congress to lessen the burden of proof for the student. Whereas the current process is nearly impossible, one of these proposals would allow a person to include the student loan in a bankruptcy if ? and it is a big if ? the lender does not offer a debt-relief option.
Still, this is better than today’s system and could allow future modifications to the law as time passes.
Part of the problem is that many students do not have access to the substantial knowledge base of grants, scholarships and other financial instruments available to attend colleges or universities. This is not limited to the infamous federal Pell Grant available to those who meet certain financial requirements, but funds available from private organizations and those outside the federal government.
From my own experience, it appears that most college finance departments also have limited knowledge of funding available beyond federal aid programs.
This is not to say that with a lot of hard work, research and correspondence, one cannot find the money to continue at the college or university of choice. A friend of mine was able to receive enough money from non-government grants and scholarships to not only pay for her education through a master’s degree, but also to have money left over to pay for room and board.
A new covey of lenders is available that is not covered under the federal student loan program, such as Social Finance (SoFi), Lending Club and Common Bond. Because of their lack of federal affiliation, they usually do not offer repayment plans directly linked to the borrower’s income if one is finding it difficult to make ends meet, as required by federally backed programs.
The opposition to relief seems to be coming from organizations that purchase bundled student loans as investment instruments. They create Student Loan Backed Securities or SLABS, securities that allow investors to bundle and buy outstanding student loans, and the amounts can be substantial. SiFi alone bundled over $2.6 billion in SLABS to investors in 2015. This is much like the bundling of homeowner loans that caused the 2008 financial crisis.
The problem with SLABS is that if the debt can be discharged through a bankruptcy by a large number of borrowers, the value of the bundled loans goes down. In 2015, Moody’s started reviewing organizations that purchase federally backed SLABS to determine if their investment companies should be downgraded, reducing the value of the company.
Like the financial crisis of 2008, dissolving these loans en masse could create yet another financial crisis ? maybe not as large as the last, but just as harmful to the potential borrower.
Of course, declaring bankruptcy has major downfalls. Individuals have to live with higher interest rates to purchase cars and homes, will have difficulty receiving credit card and, in some cases, a debit card. Even renting a house or apartment may be difficult with a bankruptcy on one’s financial record.
However, when a student cannot find a career position that pays a wage adequate to cover basic living expenses, as well as the burden of a $50,000 student loan, with tuition rates rising on an annual basis for a basic college education, relief should be possible for the entire debt.
By: David Rosman
Mar 8, 2017