By Jeffrey Freedman
Student loan debt, which topped $1 trillion last year, could be the source of this country’s next financial crisis if changes are not made to current bankruptcy laws. After the Bankruptcy Abuse Prevention and Consumer Press Release Protection Act (BAPCPA) took effect in 2005, consumers were left with virtually no options for managing private student loan debt.
Government student loans, funded by taxpayer money, are rightfully not dischargeable in bankruptcy, but they are a totally different animal from private loans. Government loans have lower interest rates, income-based repayment plans and options for deferment and forbearance. The interest on private student loans is frequently in the double digits, and income is not taken into consideration when repayment plans are set. Since BAPCPA, however, private loans have been treated the same as government loans.
New legislation proposed by Sens. Dick Durbin, D-Ill., Sheldon Whitehouse, D-R.I., and Jack Reed, D-Ill., seeks to change that, returning to earlier policies in which student loans were dischargeable if the debtor had shown a meaningful effort to pay. Currently, medical bills and older taxes can be discharged in a bankruptcy, but unless a borrower can prove “extreme hardship” – which historically has been proven only in very narrow and rare circumstances – student loan debt remains.
At a time when student loan debt levels are second only to mortgage debt levels, it is essential the Fairness for Struggling Students Act be passed before defaults on private student loans reach crisis levels. One sign that the economy is headed to a crisis in this area is that while delinquencies on credit card debt sat at approximately 3.7 percent by the end of the third quarter of 2012 (the lowest since 1991), delinquencies on student loan debt climbed to 9.1 percent.
As a bankruptcy attorney, I have seen that even in the best economy, a segment of our population will be faced with overwhelming debts due to a job loss, divorce or medical crisis. We can still help today’s debtors by developing plans to restructure their other debt, but with student loans taking a significant percentage of take-home pay, balancing a budget based on an average income is extremely difficult.
While I can’t endorse the complete dissolution of student loans, I urge Congress to vote in favor of the Durbin-Whitehouse-Reed bill. I speak not only in the interest of debtors, but also in the interest of the overall economy. The last thing America needs is another financial disaster that mirrors the mortgage loan crisis.
Jeffrey Freedman is the founder of Jeffrey Freedman Attorneys, which has offices in Western New York and has assisted clients with bankruptcy filings for more than 30 years.