The debate over student loan reform continues as lawmakers reconsider whether they could be fired in the wake of bankruptcy.
The Senate Judicial Committee met on August 3 to discuss how student loans are handled during bankruptcy proceedings. Student loans cannot be exempted from liability in the event of bankruptcy, except in cases of undue difficulty – a term that is not clearly defined and is at the discretion of the court.
Most borrowers unsuccessfully file a bankruptcy complaint against their student loans. But a new bipartisan bill aims to change that – and completely overhaul the student loan system.
The new bill will allow the issuance of a student loan in case of bankruptcy after a 10-year waiting period
During the hearing, Senators Dick Durbin (Illinois) and John Cornin (Texas) briefly introduced a new bill that would amend the bankruptcy rules for the payment of student loans.
Bankruptcy law from scratch will allow student loan borrowers to repay federal student loans after a 10-year waiting period. Colleges where more than one-third of students receive federal student loans will have to partially reimburse the state if student loans are subsequently paid off as a result of bankruptcy.
Durbin, who has represented and co-sponsored student loan reform bills in the past, noted that this will be the first bipartisan attempt to reform bankruptcy rules.
The rules for issuing student loans through bankruptcy have changed over the past 20-plus years. The waiting period for the issuance of student loans in the event of bankruptcy previously ranged from five to seven years. But in 1998, Congress rewrote the Higher Education Act and abolished the waiting period for eligibility for student loan payments; this would only be possible if the borrower found itself in undue hardship, which Durbin called “almost impossible” during this week’s hearing.
“We made a mistake in 1998,” Durbin said. “Excessive hardship shouldn’t be the only way to deal with student loans in bankruptcy. We must go back to what it was before 1998, when borrowers could seek help after a long waiting period. This system worked. “
The 10-year waiting period, according to lawmakers and witnesses, will reduce the “moral hazard” of borrowers who take on exorbitant amounts of student loan debt on the assumption that they will never have to pay back in full.
One witness, Dr. Beth Akers, senior fellow at the American Enterprise Institute, a right-wing think tank in Washington, DC, noted that bankruptcy reform “would create an effective patch” for an inadequate repayment system, but carries risks. …
Akers said that allowing private loan repayments could make it difficult for students to get loans, primarily if lenders are concerned about their ability to repay, because eligibility for private loans is highly dependent on the borrower’s credit history. But if lenders are concerned about the chances of a loan being repaid as a result of bankruptcy proceedings, this may encourage them to offer fewer unavailable loans in advance.
Listeners Agree: Student Loan Overhaul Required
The hearing also touched on the general health of the federal student loan system and its shortcomings, including: expenses for higher education is growing faster than inflation, and borrowers are taking on more debt than they can repay.
“We need to look at the entire higher education ecosystem to address these issues – a recommendation to change the bankruptcy code would only address the symptoms of a bigger problem,” said Senator Chuck Grassley (R-IA). “If we don’t address the root causes, we will close the barn door after the horse gets out.”
According to the latest report from the Federal Reserve Bank of New York on household loans and debt, 45 million borrowers have a total of $ 1.57 trillion in student loan debt. It is a financial burden that is known to postpone the milestones of many Americans, such as buying a home or having children.
The hearings also focused on borrowers defrauded by commercial colleges.
One of the witnesses, Diane Bartha, a network manager based in Richmond Hills, Georgia, has over $ 120,000 in outstanding student loan debt. Bertha accumulated most of the debt while studying for an online graduate program at Ashford University’s online for-profit school.
Barta, who filed for Chapter 13 bankruptcy but failed to include her student loans in the process, now faces monthly payments of over $ 1,000 a month and says she makes too much money to qualify for income-adjusted repayment.
“If I could pay off my loans in the event of bankruptcy – no matter how painful the filing is – it would ultimately be a great relief,” Barta said. “I would not have sleepless nights worrying about how I will pay and what will happen to my children, my husband and me if I cannot.”
Some of the victims of commercial colleges have been granted student loan forgiveness by the Department of Education. such as ITT Technical Institute… But this relief came only after years of litigation. Opening the door for student loans in the event of bankruptcy can speed up the process and ease the burden of borrowers faster.
Is Washington Student Loan Reform Stuck?
The goal of student loan reform is a political hot potato. Legislators and the president are all pushing for some overhaul of the student loan system.
Back in 2005, President Joe Biden backed changes that made it difficult to pay off student loans in bankruptcy. Now he is taking a completely different position. In the past, he has supported the payment of student loans through bankruptcy plans, and is now pushing her to extend her federal student loan waiver, which expires on September 30.
Some Democrats are constantly pushing Biden to cancel student loan debt of up to $ 50,000 per borrower. House Speaker Nancy Pelosi (DC) recently said Biden has no authority to cancel student loan arrears –Congress only…
For now, experts welcome the approach to adding student loan debt to the lawful termination of bankruptcy. Leslie Thane, a New York-based debt relief attorney, says the New Startup Act may benefit consumers, but it will have a long way to go before it actually becomes law.
“Bankruptcy laws are not updated / reformed very often; The most recent major revision of consumer bankruptcy laws was the Bankruptcy Abuse Prevention and Consumer Protection Act 2005, ”Tyne told a Forbes consultant in an e-mail statement.
Although the bill was passed in 2005, congressional debate on a bankruptcy overhaul began around 1998. Tyne also points to the 2020 Consumer Bankruptcy Reform Act, which was introduced to make bankruptcy less costly and difficult for consumers – just two decades of bill negotiation, implementation, and reform.
“It can take years for Congress to approve and implement changes to the law,” Tyne says.