New Bankruptcy Legislation Could Provide Relief For Those Buried in Student Debt

Originally published in Campus Progress

New Bankruptcy Legislation Could Provide Relief For Those Buried in Student Debt

Legislation that would allow private student loans to be discharged in bankruptcy, could provide distressed borrowers with a fresh start and bring a major victory to those dedicated to student loan justice.

By Michael Corcoran
July 30, 2010

Valisha Cooks graduated from the University of Phoenix with loan payments that amounted to $1,150 a month, much of it in private loans. Her debt burden amounted to more than half of her take-home pay. “When I took out private student loans, I had no idea that I was condemning myself to a lifetime of ruined credit, harassment by collection agencies, and the hopelessness of endless debt,” she says at a recent hearing before Congress [PDF].

Cooks is one of an approximate 17 million who have private student loan, many of whom are trapped in mounds of student debt with little hope of repayment. The default rate for private student loans is officially 7.3 percent, although the reality is actually grimmer, since these numbers do not account for people who are in deferment or forbearance and are likely to default in the future. Normally, people who suffer under such massive debt can declare bankruptcy and discharge much of their debt burden, but in 2005 Congress passed bankruptcy legislation eliminating a student loan borrower’s option of last resort, discharging student loan debt in bankruptcy.

“Now, even though I have a good job, I can’t afford to pay all my bills in any one month, I go to food banks to feed my son, and I will never be able to afford a house,” she says. “I live in constant fear that the hammer will one day drop and ruin my life and the hope for my son’s future. It is a scary, hopeless feeling.”

It is to President Barack Obama’s credit that he has made student loan justice a priority so far in his presidency. The reforms he made as part of the reconciliation bill that passed healthcare reform in March—an expanded direct lending program, more relaxed methods of repayment, and increased Pell Grants—are some of most significant changes to help students fund higher education in decades.

But the new reforms, some of which do not go into effect until 2014, do not impact any of the millions of people who have already borrowed private loans to go to college. This leaves generations of former students struggling to keep their head above water as they deal with massive student loan debt in an era where college tuition has dramatically outpaced the rate of inflation for nearly 20 years and unemployment, especially for recent college grads, is at frightening levels. The Chronicle of Higher Education recently reported that 20 percent of student loans taken out since 1995 are in default (and some argue the number is higher). Private loans in particular, which are much less flexible than federal loans with repayment schedules and deferments, are often a major reason for the high default numbers. This is why both houses of Congress have introduced legislation that would once again allow private student loans to be discharged in bankruptcy (S. 3219 and H.R. 5043).

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