Senators introduce bipartisan law to allow student loan foreclosure in bankruptcy – Forbes Advisor
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The student loan reform debate continues as lawmakers consider whether they can be discharged in bankruptcy.
The Senate Judiciary Committee met Aug. 3 to discuss how student loans are handled during bankruptcy proceedings. student loans can only be released from bankruptcy in cases of undue hardship – a concept which is not fixed and which the courts have to decide.
Most borrowers are unsuccessful in their appeals to have their student loans included in bankruptcy. But a new bipartisan bill aims to change that — and overhaul the student loan system in its entirety.
New bill would allow bankruptcy student loan exemption after 10-year waiting period
During the hearing, Senators Dick Durbin (D-IL) and John Cornyn (R-TX) briefly introduced a new bill that would revise student loan relief in the bankruptcy rules.
The new beginning through the insolvency law would allow student loan borrowers to redeem federal student loans after a 10-year waiting period. Colleges with more than a third of their students receiving government student loans would have to partially pay the government back if the student loans are later discharged in bankruptcy.
Durbin, who has introduced and co-sponsored student loan reform legislation in the past, noted that this would be the first bipartisan effort to reform bankruptcy rules.
The rules for replacing student loans with bankruptcy have evolved over the last 20+ years. The waiting times for paying off student loans in insolvency were previously between five and seven years. But in 1998, Congress rewrote the Higher Education Act, eliminating the waiting time for student loan exemption eligibility; it would only be possible if a borrower demonstrated undue hardship, which Durbin called “nearly impossible” during this week’s hearing.
“We made a mistake in 1998,” Durbin said. “Unreasonable hardship shouldn’t be the only way to approach student loans in the event of bankruptcy. We should return to what was before 1998, when borrowers could apply for relief after a considerable wait. This system worked.”
The 10-year waiting period, lawmakers and hearing witnesses said, would reduce the “moral hazard” of borrowers who take on exorbitant amounts of student loan debt on the assumption that it will never have to be repaid in full.
A witness, Dr. Beth Akers, a 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 the inadequate repayment system, but it would come with risks.
Akers said allowing private loans could make it harder for students to borrow at all if lenders worry about their ability to repay, since eligibility for private loans is largely dependent on the borrower’s creditworthiness. However, if lenders are concerned that a loan will be redeemed in an eventual bankruptcy proceeding, this could prompt them to offer fewer unpayable upfront loans.
The hearing participants agree: A revision of the student loan is necessary
The hearing also touched on the overall health of the federal student loan system and its flaws, including higher education costs are rising faster than inflation and borrowers are taking on more debt than they can pay back.
“We need to look at the entire higher education ecosystem to solve these challenges — recommendations to change bankruptcy laws would only address the symptoms of the larger problem,” said Senator Chuck Grassley (R-IA). “If we don’t address the underlying causes, we will close the stable gate after the horse exits.”
According to the latest Household Credit and Debt Report from the New York Federal Reserve Bank, 45 million borrowers owe a total of $1.57 trillion on student loans. It’s a financial burden notorious for many Americans for delaying life milestones, such as: B. Home ownership or children.
Borrowers who have been scammed by for-profit colleges were also the focus of the hearing.
One witness, Diane Barta, a network executive who lives in Richmond Hills, Georgia, has over $120,000 in outstanding student loan debt. Berta racked up most of her debt while pursuing an online master’s degree at Ashford University’s for-profit online school.
Barta, who filed for Chapter 13 bankruptcy but was unable to bring her student loans into the process, now faces monthly payments in excess of $1,000 and says she makes too much money to qualify for an income-tested repayment.
“If I could have paid off my loans in bankruptcy – painful as filing it was – it would ultimately have been a huge relief,” Barta said. “I would no longer have sleepless nights worrying about how I’m going to pay and what will happen to my kids, my husband and I if I can’t.”
Some victims of for-profit colleges have been granted student loan forgiveness by the Department of Education. like the ITT Technical Institute. But that relief came only after years of litigation. Opening the door to student loan redemption in bankruptcy could speed up the process and bring relief to borrowers sooner.
Is student loan reform stuck in Washington’s back burner?
The goal of student loan reform is a political hot potato. Lawmakers and the President are all pushing for some sort of overhaul of the student loan system.
As early as 2005, President Joe Biden supported changes that made relieving student loans in bankruptcy more difficult. Today he takes a very different stance. He has in the past supported student loan relief through bankruptcy plans and is currently being pushed by some lawmakers to extend the federal student loan grace period, which expires on September 30.
There is also an endless search by some Democrats to urge Biden to cancel up to $50,000 in student loan debt per borrower. House Speaker Nancy Pelosi (D-CA) recently said Biden does not have the authority to cancel student loan debt –only Congress does.
Currently, the approach of adding student loan debt to eligible bankruptcy relief is being welcomed by experts. Leslie Tayne, a debt relief attorney in New York, says the Fresh Start Act could benefit consumers — but may still have a long way to go before it actually becomes law.
“Bankruptcy laws are not often updated/reformed; The last significant revision to consumer bankruptcy laws was the Bankruptcy Abuse and Consumer Protection Act of 2005,” Tayne Forbes Advisor said in an emailed statement.
And while the law was passed in 2005, congressional discussion about the bankruptcy overhaul began around 1998. Tayne also points to the Consumer Bankruptcy Reform Act of 2020, which was introduced to make bankruptcy less costly and complicated for consumers – a total of two decades Discussion and implementation of the bill and reform.
“It can take years for Congress to approve and implement legislative changes,” says Tayne.