posted on 2015-03-20 by Steve Rosen
Having a bankruptcy flagged in your credit file can make obtaining a
credit card, taking out a car loan or applying for a home mortgage a
nonstarter for years. It can also affect your ability to land a job. Yet
in a move that’s certain to be scrutinized, the Obama administration is
weighing whether to loosen bankruptcy laws so some borrowers drowning
in student loan debt could unload those burdens and start fresh. The proposal is included in a recently unveiled White House initiative called the Student Aid Bill of Rights, which is aimed at providing more protections for federal student loan borrowers. The
initiatives, including a new online outlet for filing loan complaints,
come amid growing concerns about the debt that college students are
carrying after graduating. The average amount of student loan debt for
2013 college graduates was $28,400. Unlike most debts, federal
law prohibits student loans from government and private lenders from
being forgiven in bankruptcy proceedings, except in cases of undue
hardship. Even in those rare situations — and there are fewer than 1,000
people a year trying to get rid of student loans through the courts — a
bankruptcy action can be expensive and cumbersome. But the
Student Aid Bill of Rights directs government officials to explore the
possible expansion of bankruptcy options on federal student loans. No
details have been released. Why has the idea been floated? “To
make sure that more and more young people can afford to go to college
and then afterward aren’t so burdened with debt that you can’t do
anything else,” President Barack Obama said in a speech earlier this
month at Georgia Tech University, where he unveiled the proposal. Any bankruptcy law changes would have to be approved by the Republican-controlled Congress, so substantial pushback is likely. One
possible scenario, according to financial aid experts, is to allow
borrowers with private student loans from financial institutions to take
bankruptcy. That’s a small subset — only about 10 percent of
student loans are made by private lenders, according to the Credit Karma
online financial services firm. Given that bankruptcy can be one
of the most negative items pinned to your credit report for as long as
10 years, why make it easier to enter the system, even as a last resort?
What’s the incentive to fight to stay current on student loans if the
problem can be wiped out in one fell swoop? Better for former
students to focus on a host of flexible repayment options and even loan
forgiveness programs that have been expanded in recent years. Also,
don’t forget that many credit counseling services provide free loan
restructuring advice. Other aspects of the new Student Aid Bill
of Rights plan could ease the pressure on student loan borrowers and
clamp down on lending industry repayment practices. For example,
the plan directs the U.S. Department of Education to create a website by
July 1, 2016, so borrowers with federal student loans can file
complaints about lenders, servicing companies, collection agencies, and
colleges and universities. Another benefit of the new program
applies to borrowers who make higher monthly payments than required.
Under the plan, the loan servicer will have to apply the extra funds to
the student loan with the highest interest rate, unless directed
otherwise by the borrower. There’s another way to deal with all this student debt — one that gets lost in the policy debates. It
starts long before the kids head to college and involves a family
discussion about money — the cost of attending college, the importance
of picking schools that are not financial stretches, zeroing in on a
degree that balances with the cost of education and understanding that
paying back debts even a little at a time requires commitment.
|