October 11, 2014
The bankruptcy trap in student-loan debt
As a bankruptcy attorney, I get to see the issues affecting the economic well-being of Washington state families. Unfortunately, coming ’round the bend is the crisis of student-loan debt owed to private lenders.
#The bank lobby, in 2005, pushed through the Bankruptcy Abuse Prevention and Consumer Protection Act, which made private student-loan debt essentially nondischargeable in bankruptcy. Before 2005, only federal student loans were difficult to get discharged.
#The change potentially means a lifetime of indentured servitude for some American families or, at least, severe economic hardship for those who can’t find a job straight out of school.
#Families affected can end up giving all their money to the private lenders and debt collectors, or take jobs in the underground economy to avoid garnishment.
#The cycle I’ve witnessed works like this:
#A student gets a private student loan cosigned by a parent or grandparent. The student graduates with a degree but is unable to find a job.
#The interest on the loan begins to pile up and the banks begin tacking on late fees. Then the student and parents are declared in default and legal fees are tacked on, on top of the interest and late fees.
#The fees and interest are capitalized and the student and parent are put on a payment plan that, if they are lucky, covers the interest because the loan is now two to three times its original size. (This happens less frequently with federal student loans because they are regulated, and the payments are based on income.)
#Most concerning, this debt is not dischargeable in bankruptcy and it is hardly ever forgiven.
#When the foreclosure crisis hit, underlying mortgage debt was dischargeable in bankruptcy and through foreclosure. Thus, families were able to start again after they lost their home.
#With student loans, that is not the case. In most circumstances, students can’t get the debt discharged. There is no start again. Worst of all, banks and debt collectors can get a lien on the student’s or parent’s home, garnish their wages and garnish their bank accounts.
#This issue is affecting people of all ages, including seniors who often cosign on student loans. In a recent report, Bloomberg Businessweek analyzed data collected by the Federal Reserve Bank of New York and found student-loan debt is growing faster for seniors than for any other age group.
#Since 2005, the percentage of student loan debt held by persons over 50 has tripled. And while they only hold 17 percent of the total debt, these are communities that should be looking toward retirement — instead they are stuck in the student-loan debt cycle.
#Student-loan debt affects everyone, even those who don’t take out student loans. If people who take out student loans are unable to repay, they wind up in a debt cycle that prevents them from spending money in other areas of the economy. Because they are no longer contributing to the economy as a whole, through the purchase of homes and other goods, economic growth slows.
#Congress must restore the bankruptcy laws to what they were before 2005.
#The prior law forced private lenders to be more responsible because there was the threat that the debt could be discharged. It also forced private lenders to try and work with borrowers to find solutions that don’t force people into bankruptcy.
#Borrowers have a duty to be careful in the loans they take out.
#But there also need to be checks and balances.