Another MAJOR ‘wealth transfer’ from taxpayers, to non-payers. An absolute crock…
By Josh Mitchell And Katy Stech
March 10, 2015 12:17 p.m. ET
WASHINGTON—The White House said Tuesday it is weighing whether to make it easier for Americans to discharge student loans through bankruptcy, a major change that would effectively open the door for student debt being treated on par with credit-card debt and mortgages.
Federal law prohibits student loans—whether made by private lenders or the federal government—from being wiped out in bankruptcy, except in rare circumstances. Other forms of consumer credit, including mortgages, credit-card balances and auto loans, face looser requirements for being discharged in bankruptcy.
President Barack Obama , in a presidential memorandum Tuesday, directed administration officials to study whether to push for legislation to loosen the rules imposed on “all student loan borrowers” in the bankruptcy process. The White House released few details on how far the possible changes would go.
Some 40 million Americans currently hold student debt, the White House said, with total debt outstanding now roughly $1.3 trillion.
The effort was announced as part of a broad initiative the White House labeled a “Student Aid Bill of Rights.” The other steps under Mr. Obama’s plan include setting up a system for borrowers to register complaints about the companies, known as servicers, that collect student-loan payments on behalf of the government. The servicers would face stricter federal oversight and new rules designed to make them more proactive in reaching out to distressed borrowers and offering better repayment terms.
Any change to bankruptcy law for student-loan payments would likely drive up taxpayer and lending-industry costs. The government is the primary lender of student loans, making 90% of student loans annually. Private lenders such as Sallie Mae, Wells Fargo & Co. and Discover Financial Services make up about 10% of student loans.
Student loans are considered a risky form of debt because borrowers face only minimal credit checks when applying for federal student loans. Many borrowers have checkered histories and are often unemployed, or in part-time or low-paying jobs. The lending industry has argued that loosening the bankruptcy rules for student loans would increase the risk of losses and drive up borrowing costs, since lenders would raise rates to account for the additional risk of bankruptcy.
The White House said the efforts announced Tuesday are designed to stem defaults among borrowers and ease the nation’s student-loan burden. Consumer advocates have long argued that many Americans remain burdened by unsustainable student-debt loans for years, sometimes decades, and that bankruptcy should be an alternative.
“The agencies will develop recommendations for regulatory and legislative changes for all student loan borrowers, including possible changes to the treatment of loans in bankruptcy proceedings and when they were borrowed under fraudulent circumstances,” the White House said in a statement.
Fewer than 1,000 people try to get rid of their student loans every year using bankruptcy.
Bankruptcy experts say that attempting to discharge the loans in bankruptcy is both expensive and uncertain. The process involves filing a lawsuit in federal court, and lawyers typically charge several thousand dollars upfront for that work. A Wall Street Journal analysis found 713 such lawsuits were filed last year.
Many bankruptcy lawyers say they are hesitant to take on these cases because of the wide range of rulings that judges have handed down. In court, lawyers for a bankrupt student-loan borrower have to convince the judge that the borrower will never be able to afford their monthly payments—a difficult case to make.
Starting in 1976, federal loans were automatically dischargeable after five years of repayment, but borrowers could get out of them earlier if they proved that repaying them would cause an “undue hardship.” But that benefit was gradually removed, and student loan borrowers now need to establish “undue hardship” no matter how many years of federal loan payments they have made.
In 2005, Congress passed a sweeping bankruptcy overhaul for consumers that made private student loans non-dischargeable as well.