New Law Could Help Chuck Toxic Student Loan Debt

Posted February 5, 2013 in Bankruptcy Editors Picks by

Young woman holding textbooks and a past due notice

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The U.S. Senate is considering a law that would allow consumers to discharge private student loans through bankruptcy, a measure that could bring relief to untold thousands who are drowning under oppressive college debt.

“Too many Americans are carrying around mortgage-sized student loan debt that forces them to put off major life decisions like buying a home or starting a family,” said U.S. Senator Dick Durbin, one of the bill’s sponsors. “It’s not only young people facing this crisis, it is parents, siblings and even grandparents who co-signed private loans long ago and are still making payments decades later.”

The debt load of former students has reached titanic proportions, passing the $1 trillion mark last year and outstripping the nation’s credit card debt. Thirty-seven million debtors hold an astonishing average of more than $24,000 in student loans apiece.

With rare exceptions, neither government nor private student loans can currently be wiped out through bankruptcy. If they aren’t paid off, the government can even dock Social Security payments of debtors.

An estimated $150 billion of the loan total comes from private sources, which don’t have the same consumer protections that government loans carry.

Separate legislation would require colleges to make sure students are aware of the risks of private loans and don’t have better options before they take on unnecessary debt.

 

Ticking Time Bomb

Attorney James R. Meizanis headshot

James R. Meizanis

If the law passes it means consumers who hit rock bottom will have a better chance to get back on their feet. “The main advantage to this would be that students or former students could get private loans wiped out just the same as normal unsecured debt like credit cards or medical bills,” says James R. Meizanis, a bankruptcy attorney for Tully Rinkey.

Private loans used to be dischargeable in bankruptcy, but in 2005 Congress passed legislation exempting them, joining federal loans which have been exempt from bankruptcy since 1978. “What this has done is create a big hardship on debtors who have private student loans and can’t make payments,” Meizanis says. “Private loans don’t have options like an income-based repayment plan, and interest rates are also something that fluctuate a lot more, whereas borrowers can be on a fixed rate with government loans.”

The legislation comes in the wake of news that some $300 billion of the student loan debt is considered sub-prime, owed by borrowers who aren’t likely to pay it back on time or at all. About 12 percent of loans hadn’t been paid for more than three months, as of last March.

The phrase “sub-prime loan” may provoke unpleasant flashbacks to the 2008 mortgage crises and accompanying recession. And for good reason — analysts are concerned about a student loan bubble that could burst and cause more economic wreckage. “It’s been called a student debt time bomb,” Meizanis says. “It’s there, ticking and set to go off at some point. What these senators have proposed is something to be proactive and try to not get to that point.”

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