Wednesday, April 11, 2012

Student Loan Relief:
Is Change on the Horizon?

Student-loan relief has recently become a hot topic.  Several studies suggest that student-loan debt now exceeds $1 trillion – or what the National Association of Consumer Bankruptcy Attorneys calls, the next “debt bomb.” 

The federal student loan program provides those who cannot afford to go to college a unique opportunity to finance their education.  The typical student-loan customer is an 18-year-old, generally with only a limited credit history.  Student loans are unusual in that the student provides nothing in the loan application to prove his or her ability to repay the loan.  Some would say student loans are secured – on the student’s future, that is, since the loans are non-dischargeable in bankruptcy.  Student-loan debt relief, if passed, thus has the potential of becoming a major economic stimulator, according to consumer law advocates such as the National Consumer Law Center and National Association of Consumer Bankruptcy Attorneys.

Currently, under the Bankruptcy Code, it is difficult if not impossible to discharge student loans.  Prior to 1998, student loans were dischargeable; but in 1998 the Bankruptcy Code was amended to make federally guaranteed student loans non-dischargeable.  The 1998 changes, however, still allowed for the discharge of private student loans not guaranteed by the federal government.  After the 2005 revisions to the Bankruptcy Code, federally guaranteed loans and private loans were treated the same, and all student loans today are non-dischargeable unless an “undue hardship” exists.

Some argue the steadily increasing federal student loan limits help feed runaway tuition costs. Tuition costs have been on a steep incline, with no ceiling or rollback in sight.  Government provides a “good” with guaranteed student loans, but then gains revenue from the interest on the large loan balances when they enter repayment.  Does anyone think a traditional bank lender would provide an 18-year-old $46,000 in unsecured credit for one year and then wait three more to begin collecting on the debt? 

The spotlight is on student loans right now; Congress saw it shining or turned on the light.  The subject has become a pillar of the economic recovery talks.  Representative Hansen Clarke (D-MI) proposed H.R.4170, the “Student Loan Forgiveness Act of 2012,” which has received a lot of buzz and appears to be the most comprehensive proposal for student loan relief.

"Our bill recognizes that many American students and graduates now owe more on their student loans than their degrees are, in dollar terms, worth.  The bill seeks to fix this situation by lowering Americans’ debt burden and making future student loan repayment both simple and fair.  In doing so, it would give millions of Americans more purchasing power, jumpstarting the economy and creating jobs,” said Representative Clarke. 

The “Student Loan Forgiveness Act" would cover both federal and private loans.  The basic premise is that borrowers would be required to pay 10 percent of their discretionary income for 10 years, with the remaining federal student loan debt being forgiven.  Interest would be capped at 3.4 percent, with additional provisions if the borrower pursues a career in public service.

H.R. 2028, the “Private Student Loan Bankruptcy Fairness Act of 2011,” proposed by Representative Steve Cohen (D-TN), is yet another piece of proposed student loan legislation garnering attention.  The “Private Student Loan Bankruptcy Fairness Act” would modify the Bankruptcy Code to allow the discharge of qualified educational loans.  Senator Dick Durbin (D-IL) has also proposed a bill, S. 1102, “Fairness for Struggling Students Act of 2011,” which will allow private loans to be discharged in bankruptcy. 

Short-term relief is being offered right now.  Special Direct Consolidation Loans are being offered by the Department of Education, though only between January 1, 2012 to June 30, 2012.
Student-loan relief legislation has been proposed many times in the past, but never with as much media attention as we have seen in the past couple of months.  It will be interesting to see if this time change really is on the horizon.

McGinnis, Lochridge & Kilgore, LLP

1 comment:

  1. I wonder if an easier solution might be to simply return to the pre-1998 Bankruptcy Code provision that allowed debtors to discharge in bankruptcy student loan debt that came due more than 7 years previously. It seems odd to me that tax debt can be discharged once it is 3 years old, but student loan debt, incurred by rising college freshman who have no idea about the long term consequences of this debt, are essentially saddled with it forever. This week I wrote a guest op/ed in the Atlanta Journal proposing this solution - it will be interesting to see what kind of reaction I get.