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 President Barack Obama last week directed three U.S. government
agencies - the Department of the Treasury and Education as well as
the Consumer Financial Protection Bureau - to report by Oct. 1
whether bankruptcy or other laws and regulations should be revised
for student loans.
One change that is long overdue, and suggested by a group of
Democratic senators who introduced a bill last Friday, would be to
make private student loans erasable in bankruptcy court.
Led by Senator Dick Durban of Illinois, the lawmakers introduced The
Fairness for Struggling Students Act of 2015 to revoke private
student loans' special treatment. But the bill is expected to have
little chance of passage in the Republican-controlled Congress.
That is unfortunate since the 2005 law that gave private student
loans parity with federal student loans is difficult to defend.
In contrast to federal student loans, private education loans do not
use taxpayer funds or have government guarantees. Federal student
loans also do not use credit scores or vary interest rates to
reflect default risk, while private lenders do.
Private lenders typically require creditworthy co-signers, while
federal loans do not.
In other words, private student lenders can and do employ methods
that compensate them for the risks they take. Yet their loans get a
much higher level of protection in bankruptcy proceedings than
mortgages, auto loans, credit cards or any other privately-issued
debt.
Another much-needed change, which likely would not require
congressional action, would be to call off the
watchdog-turned-attack-dog that fights the most troubled debtors'
efforts to erase federal student loans.
Currently, very few people are able to erase any student loans in
bankruptcy court, no matter how dire their financial or personal
situations. Debtors must prove not only that they cannot maintain a
minimal standard of living while paying their debt, but that their
situations will not improve.
FINANCIAL CHALLENGES
The few borrowers who try to prove their financial desperation
typically meet aggressive legal challenges from the Educational
Credit Management Corporation, a private nonprofit hired by the
federal government to monitor bankruptcy cases.
The National Consumer Law Center has denounced ECMC's "over-the-top,
hardball tactics," while an investigation by The New York Times
found the agency "has veered more than occasionally into dubious
terrain."
A New Hampshire bankruptcy judge sanctioned ECMC for abusing the
bankruptcy process by pursuing a woman who had already paid off her
student loans. In another case, ECMC appealed a partial student loan
discharge for a victim of pancreatic cancer and numerous other
ailments, arguing that she failed to prove that a recurrence of the
notoriously lethal cancer was "a probability, rather than a mere
possibility," court records show.
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Advocates for overwhelmed student borrowers say ECMC's relentless
assaults and appeals drive up the already-daunting costs of filing
for education debt relief.
The agency says it is trying to recoup as much money for taxpayers
as possible. "Our employees in the loan-servicing side of our
company go into work every day focused on two things: doing the job
we are contracted to do on behalf of taxpayers and the federal
government, and treating every student with the respect, empathy and
dignity they deserve," ECMC Group president and CEO David Hawn said
in an emailed statement.
In fact, ECMC was created in 1994 because another agency that
guaranteed federal student loans collapsed after huge numbers of
borrowers ignored their debts. But numerous reforms since then have
made it much harder to walk away from education debt and provided
more income-based repayment options for struggling debtors.
So those landing in bankruptcy court now are the "blood from a
stone" cases with little if any money to be recouped. The bankruptcy
standard has been set so high that there is no real need to pursue
appeals with such fervor.
Bankruptcy law does not allow student loans to be erased in a
regular filing. Instead, attempts to discharge education debt
require an additional filing known as an "adversary proceeding."
A study published in the American Bankruptcy Law Journal found that
only 213 of the 170,000 people with student loans who filed for
bankruptcy in 2007 took that extra step. Of those, 51 won full
discharges of their loans and 30 received partial discharges.
Adversary proceedings require substantially more work for attorneys
who are employed by already cash-strapped clients. Those who win
discharges typically either represent themselves or have free legal
help, bankruptcy attorneys note.
Given these high hurdles, ECMC's bellicose approach is simply
overkill. If the federal government wants to continue using its
services, the agency should be required to use common sense - and
common decency - before pursuing hapless borrowers.
(The author is a Reuters columnist. The opinions expressed are her
own.)
(Editing by Lauren Young, G Crosse and Beth Pinsker)
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