Thursday, September 20, 2007

Private Student Loans Bankruptcy Discharge

Finally!! From Chronicle of Higher Ed:

Proposed legislation in Congress would allow borrowers to discharge their private student loans -- but not federally guaranteed loans -- after five years of repayment.

The bill, S 1561, was introduced in June by Sen. Richard J. Durbin, Democrat of Illinois, and is now pending before the Judiciary Committee. While the measure's future is uncertain, it may be attached to other legislation moving through Congress this year.

Supporters say the bill would provide much-needed relief to borrowers who find themselves in severe financial distress, while discouraging banks from making loans to students who are likely to default. They argue that it is unfair for the government to treat student loans more harshly than other forms of unsecured debt.

"We are more forgiving of the middle-aged guy who buys a Corvette and stops making payments than we are of the 22-year-old who goes to college and drops out," says Luke Swarthout, a higher-education advocate with the U.S. Public Interest Research Group. "If our laws are a reflection of our values, is that our value system?"

19 comments:

Adam said...

Ok, now we're back to normal. There's a difference between a loan for a Vette and a student loan. Let's do a rundown:

1. Vette has a immediate Loan-to-Value that can be calculated. Basically, this says that by "discouraging banks from making loans to students who are likely to default" we are allowing them to only make loans to business, computer science, and engineering students with a decent credit history and or well-qualified cosigners. So much for that low-income, inner-city kid who made the grade but can't afford to go to college.

2. The interest paid on a Vette is generally much higher than student loan interest rates unless the borrower has exceptional credit. 18 year olds going off to school don't have credit... no bank would underwrite someone's tuition unless there were more guarantees in place. That's why you can't currently discharge student loan debt in bankruptcy.

3. This is most important - you can repo a Vette and sell it to recover the majority of your lost principle. You can't do that with a student loan.

Making these changes will undoubtedly make it more difficult for a student to obtain a private loan at a reasonable interest rate. I don't think that is anyone's objective here, which is why this is a bad, bad, bad piece of legislation.

Anonymous said...

Higher than what? You can't be saying that the interest rate for automobile loans is above 20%. Sounds like you are confusing "private" federal loans (guaranteed student loans) and private non-federal loans, where the rate varies from prime to 25%, depending on a wide variety of underwriting criteria. Professional school students (and undergrads with co-signers) get the best interest rates. Playing the "inner city" card is simply a red herring in this area. And it is cheaper for a lender to disregard college major than to hire an army of investigators to check out everyone's majors.

Adam said...

You're wrong... I actually am in the business of Auto Finance and I manage a portfolio that includes premium car loans with interest rates up to 24.95%... and yes, it's stupid to take out a loan at that rate - but it's not stupid to make loans at that rate when you've got recourse to recover the principle in cases of default.

I'm not confusing federal and private loans... I'm saying that I don't care what banks do with their money as long as they are still able to make money. If that means they stop making private student loans, then great... put that capital to more productive uses in other markets. I just don't want to hear a bunch of liberal backlash when banks decide to close up shop in the private loan industry because they can no longer make realistic returns with realistic lending practices.

I also don't want to hear a bunch of liberal backlash when banks refuse loans to students (like my brother-in-law and several friends) who are going to school for a degree in social work (or any other slew of low income, warm-fuzzy feeling jobs).

Anonymous said...

I agree that this new legislation is a bad idea. I also believe that this could create a moral hazard problem - take out a student loan and see if I get a job, if not file for bankruptcy. Besides the lenders will price this dischargibility risk in the loan, further increasing the cost to the borrower. It does not seem like the student community will really benefit in anyway.

Anonymous said...

Senator Durbin,

What is the status of bill S1561 you introduced in June regarding student loan debt?

I am a 32-year-old, born in up-state New York, college educated, extremely hardworking, volunteering in my community, and drowning under student debt. It has severely limited my ability to raise additional children and live in a happy home with my wife.

I hope the greed and wickedness prevailing atop of our great American institutions and amongst the Baby-Boomer population is not surprised when The Day of The Lord arrives as a thief-in-the-night to this once-great nation and we all find ourselves sitting in the dust.

Even the ancient Israelites of the Old Testament had a release from debts every seven years. Are government leaders so wise in their own eyes to be blinded from the wisdom behind such justice?

May I also mention - our nation no longer produces strong men. It breaks them down. It promotes mediocrity, feminism, hedonism, and self-centeredness. Boys today are weak, effeminate, cowardly, faithless. Mostly because the american family is dead. Career women, working for luxury, are not home raising up our next generations.

Faith is almost lost in this American government. We will not stand against our enemies in the future. When I study the virtue of George Washington or Cato of Rome I am embarrassed by the current state of my country. What an awful shame.

Regards,

Keith

Anonymous said...

First, the non-dischargeability of these loans was enacted far too recently for an impact, even if logical, on loosening underwriting. Hence, reversing the change would have almost zero impact at this point. Second, you would only have to get a car loan with an int. rate above 20% if you had a history of bad credit. Third, this debate is somewhat irrelevant because we are not talking about a lot of people obtaining these education loans. Almost every household in America has a car; many have more than one. Less than two percent of undergrads get a private non-federal loan in a particular year; it is five percent of graduate/professional students. (The latest info available is from 2003-04.) The students who DO get these loans borrow quite a bit, hence the relatively large annual total amounts borrowed.

Fourth, even if the recent enactment of nondischargeability has impacted "the capital markets," you are not going to see a "redeployment" between lenders making car loans and lenders making private educ. loans. Although it might sound like it makes sense in economics 101, there aren't lenders operating simultaneously in both markets and there are not financiers thinking like that. In addition, the ROE in private educ. lending would have to be 80 percent or more for underwriters to take the time and effort (and thousands of auditors) to check students' majors. Despite what you hear in the media, these loans are in fact guaranteed. They are just not federally-guaranteed. There are a short list of non-federal entities that guarantee the private educ. loans.

It sounds like you are saying that lenders should charge more interest and fees to the borrower when there is collateral. This is counterintuitive.

Anonymous said...

i will take full advantage of this bill if the opportunity presents itself.

the private student loan companies are unAmerican, legalized loansharks. my private loans were at 18% interest right of the bat (and have since risen). i've been paying for years and watching my principal GROW! thats a racket America.

like many hardworking Americans(not capitalist fundamentalist pigs)i will have to roll all my loans into a home loan, paying more than triple what i borrowed in the first place. i pay my 4% federal loan happily every month and watch as my principal shrinks.

that said, most universities should not be charging so much for their pedantry...

WizCoder said...

Well, it looks propper
www.studentaides.com

Poly Muthumbi said...

When I think of defaulted student loans, I get vexed because I would not like to fall prey to this embarrassing scenario, not for one second! Defaulted Student Loans can get you so devastated that it irks for the rest of your life. Yet it may not be your willpower for it to happen. It may have been an unavoidable reason, like problems at home or incapacitation. But then you can not ignore the fact that some of us disregard responsibilities to pay for the student loans and as a result keep a bad credit history.

Poly Muthumbi is a Web Administrator and Has Been Researching and Reporting on Student Loan Consolidation for Years. For More Information on Student Loan Consolidation, Visit Her Site at DEFAULTED STUDENT LOANS

Poly Muthumbi said...

Many times we look forward to accomplishing our dreams one of them being education. Education is very expensive according to whichever lever you may be at, from high school to college education and universities. The higher you go the more expensive it becomes and the more your future takes a good shape. Therefore, expensive is a terminology that you should not think about as a drawback in your education life. On the contrary, think positive about it and consider applying for student loans to fight this gigantic financial rival.

Poly Muthumbi is a Web Administrator and Has Been Researching and Reporting on Student Loan Consolidation for Years. For More Information on Private Student Loan, Visit Her Site at PRIVATE STUDENT LOAN

Indira said...

To obtain a discharge based on undue hardship in the Ninth Circuit (which includes California) you must prove all of the following:
1. that you cannot maintain, based on current income and expenses, a 'minimal' standard of living for yourself and your dependents if forced to repay the loans;
2. that additional circumstances exist indicating that this state of financial affairs is likely to persist for a significant portion of the repayment period of the student loans;
3. that your credit history is good and you do not have a bad credit mortgages; and,
4. that you made good faith effort to repay the loans, for example, by past payments for several years, etc. Making payments is not always required if you didn't ever have the money to pay the loans. Forebearances may be sufficient.

Anonymous said...

Both private and federally guaranteed loans should be fully dischargeable after SOME period of time. Senator Durbin's bill is a step in the right direction.

I graduated from law school in 1990, with under 60K in student loan debt. Despite repeated attempts to pass the bar exam, I'm unable to do so. Despite making small payments and having my wages administrative garnished for many years, the debt has balooned to almost 300K with penalties and collection fees. I make a decent income of about 70K per year.

My scheduled monthly student loan payments have consistantly exceeded my total take home pay since 2001. I've attempted many times to negotiate with my lenders, but they will not negotiate downward. Thus, I'll live with administrative garnishment for the rest of my working years. Further, Social Security benefits are subject to administrative garnishment, so I'll remain in this state for the rest of my life. My loans first became due eighteen years ago. I've long since lost all hope.

Jim said...

Think Again!!

Be they private loans or government backed loans, a loan is a loan is a loan. There is a promise to pay element involved in either case. And when people have problems in their lives, be they from death, divorce, lose of a job or business, people have problems at time in their lives.

Bankruptcy is a safety net. It has been used, historically, as a means for people to have a fresh start and when this safety net has been basically taken down, folded up and put isto storeage, people have little or no choice as to what to do to protect themselves from those who would do them emotional, and financle harm.

There MUST be a means for people to protect themselves before they drop so low they may never be able to get back up. This has been the tactic of our government which as been working to protect the lenders of student loans for far too long. It's time for a change. It's time to have standard consumer protections for people no matter what the cost.

Anonymous said...

I just went to this link mentioned above www.studentaides.com And, I didn't read the entire thing because I broke out loud LAUGHING in DISGUST! It seems that there is a Private Student loan lending company that has just filed bankruptcy! Let me get this stright, the company gets to file, but the individual does not? Anyhow, I find this ironic.

I agree with those in favor of this legislation. People that get degrees are trying to improve their life, not make it worse. If you happen to be lucky and grow up in an era when the economy is good, then great. But, sometimes the economy and the job outlook is not as bright and there needs to be some way out.

berto xxx said...

First, the non-discharge ability of these loans was enacted far too recently for an impact, even if logical, on loosening underwriting. Hence, reversing the change would have almost zero impact at this point. Second, you would only have to get a car loan with an int. rate above 20% if you had a history of bad credit. Third, this debate is somewhat irrelevant because we are not talking about a lot of people obtaining these education loans.

The private student loans companies are unAmerican, legalized loansharks. my private loans were at 18% interest right of the bat (and have since risen). I've been paying for years and watching my principal GROW! thats a racket America.

struggling student said...

I am about to graduate with my B.A. in May and have approximately $60K in PRIVATE student loans. Because of the unreasonable standards set by the government on income I was ineligible for much federal relief and was forced into the predatory arms of the private sector. It is ridiculous to think that the only way middle class people in this country can go to college is if they want to spend the rest of their lives suffering in enormous amounts of debt!

I am not one of those people who purchased a house I knew I could not afford. Neither I, nor my family, are now benefiting, nor have we ever benefited from, government assistance of any kind. I have held down jobs since I was 15 years old, including both a full and part time job while in college. I have contributed for years, and will continue to contribute, to the tax base. All of this and the government is telling me they cannot help me?

They will not help me better myself, which in turn betters the country, but they can give breaks to people who defaulted on mortgages they never should have received? They can help the very banks who offered up these mortgages that created the whole credit mess? They can do all of that, costing the tax payers (myself included) billions, but they cannot keep private student loan organizations from preying on desperate students who have no other way to go to college?

I am not asking for a free ride, I would love to be able to pay for my loans. However, with the unreasonable interest rates applied to them I cannot. I have already received a job offer for $35K a year and medical benefits (surprising in this economy and very reasonable for someone fresh out of college) and even with that there is absolutely no way that I can pay back loans and maintain anything near a reasonable standard of living. In fact, attempting to pay them back could force me further into debt (this time with credit card companies who are just as bad). All I am asking for, for me, and for the millions of others out there, is a little help!

Our government gives free hand outs to illegal aliens, to people who are content to stay in poverty and not better themselves, people like the unemployed and unmarried mother of octuplets (brining her total to 14 children without a father) via food stamps and medical benefits, to people who make unwise financial decisions (like buying homes they can't afford), to the banks that caused all of the current problems (who use the money on "team building retreats") but they cannot help their future?

Food for thought: out of all my high school friends who even tried to go to college, but who had to pay for school with out government assistance programs (because our parents made "too much money" or because of our race. Yes I am bringing race into the equation, let’s be real, it affects federal aid!) I am the only one who will graduate. Everyone else has dropped out of college because there was no way for them to pay for it. There was no way they could be granted, or pay back, private loans. This is practically a type of class legislation! These lenders and the government, based on their laissez-faire attitude toward lender practices, are discriminating against groups of people and in turn keeping them from achieving the “American dream,” that is if it still even exists. Are we really saying (through lack of legislation and protections) that middle class people, or people with bad credit, cannot go to college?

Again, I am not asking for a free ride, but for a reasonable one. I have no idea how I will survive if forced to pay back the entire amount of these loans (mostly due to the unreasonable interest rates). And for added insult to injury, unlike most college students, at the time of applying for some of these loans my credit score was as high as 750 and has not dipped below 700 since. Yet still, sadly for me, there aren't many options. Even though the government is aiming to make it more difficult, trying to claim bankruptcy under the "undue hardship" idea from the Brunner case (Brunner v New York State Higher Education Services Corp. for those of you not aware of it) may be my only choice. Other than that there isn't much for the everyday middle class person to do.

Something is wrong here and it needs to be changed! All of the Democrats are trying to say they are against lobbyist (including President Obama), that they are trying to represent the needs of their constituents rather than big business like the Republicans do. To them I say prove it! You have the power now. Turn your backs on these banks and their campaign donations, and do your job. Help me, help all the others like me, and most of all help your future. If you can't do it for the right reasons, think about yourselves, something all you politicians do best! Think of all the voters (both now and in the future) who will be appreciative!

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