Unlock the Debtor’s Student Loan Prison

Earlier this year, a judge exposed the myth that student loans can’t be erased in bankruptcy court as she excused a Navy veteran from having to pay $221,000 in college debt. studies. Bankruptcy Judge Cecelia G. Morris’ decision has made headlines, along with speculation that the decision could facilitate such discharges.

The battle is not over, however. Days later, Morris’s decision was appealed by the Education Credit Management Corporation, a nonprofit company that underwrites and administers federal student loans for the US Department of Education.

The reality is that get student loans erased in bankruptcy, although technically possible, is so difficult and expensive that few people try; even fewer succeed. Without Congressional intervention and a change of heart at the Department of Education, troubled borrowers will continue to be trapped in a virtual debtor’s prison: unable to pay what they owe and unable to get on with their lives.

Taxpayers’ money is also wasted. ECMC has a long history of aggressively opposing student loan releases, even when there is little hope of recovering money. Among other cases, the ECMC has notoriously fought bankruptcy relief for a woman diagnosed with pancreatic cancer; a mentally ill formerly homeless woman subsisting on Social Security disability benefits; and, in the case of Navy vet Kevin Rosenberg, the object of Morris’ decision, a man whose basic living expenses exceeded his income.

Obviously, getting away from student loan debt should never be easy. But getting relief from unpayable student debt should never have become so difficult.

That was the consensus of an expert panel of bankruptcy judges, lawyers and academics who studied the issue and made their recommendations public last year. The American Institute of Bankruptcy Consumer Bankruptcy Commission suggested changes judges could make to help more borrowers, but real reform will require new laws and a more sensible, cost-effective approach from the Department of Education.

Among the committee’s recommendations:

Allow private student loans to be erased

Federal student loans are backed by taxpayers’ money, so it makes sense that they’re harder to pay off than credit card debt or medical bills. But Congress granted the same status to private student loans in 2005. Unlike federal student loans, private student loans are underwritten, which means that lenders assess borrowers’ ability to repay, charge interest rates that reflect the risk of default, and often require co-signers to guarantee the repayment. Protecting private student loans in bankruptcy court may protect lenders’ profits, but it’s hard to argue that it’s somehow in the interest of taxpayers. The committee recommends that Congress change the law to allow private student loans, as well as loans taken out by parents and other relatives for their children, to be more easily forgiven.

The seven-year standard should be reinstated

In 1976, Congress decided that overwhelmed borrowers could have their student loans wiped out by bankruptcy once five years had passed since the first payment was due. Debtors could get relief sooner if the repayment represented an “undue hardship”. In 1990, Congress lengthened the waiting period to seven years.

Meanwhile, the courts tightened the rules on what ‘undue hardship’ means – with the understanding that those who could not prove undue hardship could still get the debt forgiven within a few years. In 1998, however, Congress eliminated the element of time entirely. Now, borrowers are held to the strict standards the courts had developed under previous laws, but without the promise of eventual redress.

The commission recommends returning to the seven-year standard, noting that if borrowers were still struggling at that time, their circumstances were unlikely to improve enough to repay a significant portion of their loans. Getting rid of debt, on the other hand, could allow people to buy homes, start families, start businesses, and otherwise engage in productive activity that contributes to the tax base.

Remind the dogs

The commission denounced “expensive and ineffective litigation”, noting that the Ministry of Education and the ECMC regularly fight rejections, regardless of the cost or benefit.

Instead, the commission recommended the department adopt clearly defined rules that would prevent student loan collectors from objecting to discharges of people receiving Social Security or veterans’ disability benefits, or whose incomes were below 175% of federal poverty levels. In other cases, collectors would be required to do a cost-benefit analysis so as not to waste government money.

“That doesn’t mean we’re telling the department that it’s enough to write off all student loan debt,” said William Houston Brown, a retired bankruptcy judge who co-chaired the commission. “Don’t spend your litigation money on useless things.”

This article was written by NerdWallet and was originally published by Associated Press.