[author: Aaron Kase]
A new law under consideration by the United States Senate could make bankruptcy a viable option for consumers who are struggling to repay their student loans, if the loans came from a private lender.
Student loans cannot currently be discharged in bankruptcy without rare “undue hardship”
$1 trillion in student debt seen as threat to the nation’s economy
“Fairness for Struggling Students Act” would grant avenue of relief for people who can’t pay
Student loan statistics in the last decade have taken a a turn for the absurd, with the average college student graduating with $25,000 in the red, and the total unpaid debt surpassing $1 trillion nationwide. Even in a fully-functioning economy where graduates could expect to matriculate into decent paying jobs, loans on such a scale can be crippling. And with the job market in fact still sputtering, especially for people in their 20s, the country is facing what the National Association of Consumer Bankruptcy Attorneys called a “debt bomb” that will “be a drag on the economy for the foreseeable future.“
Worse, student loan debt cannot currently be discharged through bankruptcy except in the most extreme cases, meaning whatever you signed up for when you were 18 and stupid, you’re stuck with for life.
Relief, however, could be on the way in the form of the Fairness for Struggling Students Act, a piece of legislation championed by Senator Dick Durbin from Illinois. The act would make loans from private lenders fair game in bankruptcy proceedings, just like credit card bills, leases and most other kinds of debt.
“It’s clear that too many students have been steered into loans that they will not be able to repay and that they will never be able to escape,” Durbin said of the legislation.
The catch: loans taken from the government, like state loans or the popular federal Perkins and Stafford loans, would still have to be paid back. On the plus side, government loans usually have more consumer protections built in, where private loans have taken on an almost sleazy, predatory reputation in many cases.
Should student debt be considered in the same category as child support and taxes, obligations that follow you to the grave regardless of your bankruptcy status? “If you can’t find a job and you’re doing everything you can to find a job, but something has happened or intervened or prevented you from being able to do that, I think relief is appropriate,” says Robert Rock, a bankruptcy attorney from New York.
Harvard University: $54,496 per year
“It is a delicate line,” Rock says, noting that bankruptcy laws strive for fairness to the creditor as well as a fresh start for the debtor. “I think the bill takes a step in the right direction to provide additional relief, where people are trying but there’s nothing they can do to service the debt, and with interest and penalties it ends up going through the roof.”
The attorney suggests other measures that could also bring some sanity to the financial futures of young Americans. One would be to lower the bar for the “undue hardship” standard, which already allows student loans to be discharged through bankruptcy in extreme cases, but is almost impossible to qualify for. “It’s almost to the point where undue hardship means someone took a loan to go to Julliard to play piano, and had an accident and had their hands amputated,” Rock says.
“The other thing is to look at the root cause of the problem,” he notes. “The cost of education is a runaway train. Something has to be done to stop that.”
One way or another, the country will have to address the discrepancy between what students have to pay for an education and what, if anything, they can expect to earn on graduation. “If you can walk out of college with a BA and walk into a situation where you are able to service your loans, you’re very fortunate indeed,” Rock says. “As we get into a situation now where there’s a bigger and ever growing pool of student debt, something is going to have to give.”