Among the many ideas being considered to ease the nation’s student loan debt crisis is this one: Allow cash-strapped borrowers to wipe out their repayment obligations through federal bankruptcy court.
My recent column on President Barack Obama’s proposal to change bankruptcy laws so many student loan borrowers could start fresh touched a nerve with several readers. Some were outraged, but others said bankruptcy is the answer.
It’s not surprising that people would have strong opinions on the issue, given the rising cost of a college education and the sacrifices many families make to cover the bills. By the latest count, nearly 40 million people are carrying student loan debt, with the average amount hovering around $29,000.
And according to a report Thursday from the Federal Reserve Bank of New York, only 37 percent of borrowers are current on their loans and are actively paying them down. An additional 17 percent are in default or in delinquency.
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Unlike most debts, student loans from government and private lenders generally are prohibited by federal law from being forgiven in bankruptcy proceedings. However, there are exceptions, such as in cases of undue hardship or other situations involving private student loans, according to credit expert Steve Rhode.
In addition to the White House proposal, a bill was introduced in the Senate last month that would let borrowers eliminate debt from private student lenders. But those loans account for only about 10 percent of the market.
John Marcolla was among the readers who believe easing the bankruptcy process would be bad policy.
“Having sacrificed and worked hard to pay for my three children’s educations, I find it absurd that student loan relief and forgiveness is even a possibility,” Marcolla wrote.
He also noted that the high level of student loan debt is a clear reminder that “common sense and the return on the cost of the education needs to be considered when borrowing money to pay for college or technical training.”
Jim White wrote that any suggestion that bankruptcy laws should be changed “for the benefit of deadbeats and to the detriment of taxpayers is outrageous.”
Much like the mortgage crisis during the Great Recession, White noted, the “government by way of the taxpayer is expected to make the situation whole.”
Schools are part of the problem, said White, particularly some for-profit institutions whose “profit motive exceeds their interest in academic accomplishment.”
But count Robertson Cohen on the other side of this debate. Cohen, a bankruptcy lawyer, Chapter 7 bankruptcy trustee and parent with college costs on the horizon, wrote that if “all student loans, not just private loans, were dischargeable in bankruptcy, you would see the cost of college curbed.”
He elaborated: “Why are there limits for our credit cards, home mortgage, even small business loans? Because at the end of the day, they are all dischargeable in bankruptcy. At the end of the day, someone, be it the bank or the government, is simply unwilling to take the risk of loss beyond a certain point. But when that risk of loss is eliminated, the money will flow, and there will be unintended consequences … rampant increases of college tuition and saddling the youth with debt beyond their wildest dreams.”
To sum it up, these comments give you a sense of the national debate over student loan debt. The fate of bankruptcy changes is unclear, but any measure would have to go through a Republican-controlled Congress that’s not likely to bend.
Borrowers would be far better off pursuing options currently available, such as flexible payment terms, caps on interest rates and, in some cases, the possibility of getting balances waived entirely for good repayment histories.