Congress
must restore bankruptcy laws so that families do not end up trapped by
student-loan debt
By
Sam Leonard
Seattle Times
October 7, 2014
AS a bankruptcy attorney in Seattle, I get to
see the issues affecting the economic well-being of Washington families.
Unfortunately, coming ’round the bend is the crisis of student-loan debt owed
to private lenders.
The bank lobby, in 2005, pushed through the
Bankruptcy Abuse Prevention and Consumer Protection Act, which made private
student-loan debt essentially nondischargeable in bankruptcy. Before 2005, only
federal student loans were difficult to get discharged.
The change potentially means a lifetime of
indentured servitude for some American families or, at least, severe economic
hardship for those who can’t find a job straight out of school. Families
affected can end up giving all their money to the private lenders and debt
collectors, or take jobs in the underground economy to avoid garnishment.
The cycle I’ve witnessed works like this:
A student gets a private student loan
co-signed by a parent or grandparent. The student graduates with a degree but
is unable to find a job.
The interest on the loan begins to pile up
and the banks begin tacking on late fees. Then the student and parents are
declared in default and legal fees are tacked on, on top of the interest and
late fees. The fees and interest are capitalized and the student and parent are
put on a payment plan that, if they are lucky, covers the interest because the
loan is now two to three times its original size. (This happens less frequently
with federal student loans because they are regulated, and the payments are
based on income.)
Most concerning, this debt is not
dischargeable in bankruptcy and it is hardly ever forgiven.
When the foreclosure crisis hit, underlying
mortgage debt was dischargeable in bankruptcy and through foreclosure. Thus,
families were able to start again after they lost their home.
With student loans, that is not the case. In
most circumstances, students can’t get the debt discharged. There is no start
again. Worst of all, banks and debt collectors can get a lien on the student’s
or parent’s home, garnish their wages and garnish their bank accounts.
This issue is affecting people of all ages,
including seniors who often co-sign on student loans. In a recent report, Bloomberg Businessweek
analyzed data collected by the Federal Reserve Bank of New York and found
student-loan debt is growing faster for seniors than for any other age group.
Since 2005, the percentage of student loan debt held by persons over 50 has
tripled. And while they only hold 17 percent of the total debt, these are
communities that should be looking toward retirement — instead they are stuck
in the student-loan debt cycle.
Student-loan debt affects everyone, even
those who don’t take out student loans. If people who take out student loans
are unable to repay, they wind up in a debt cycle that prevents them from
spending money in other areas of the economy. Because they are no longer
contributing to the economy as a whole, through the purchase of homes and other
goods, economic growth slows.
Congress must restore the bankruptcy laws to
what they were before 2005. The prior law forced private lenders to be more
responsible because there was the threat that the debt could be discharged. It
also forced private lenders to try and work with borrowers to find solutions
that don’t force people into bankruptcy.
Borrowers have a duty to be careful in the
loans they take out.
But there also need to be checks and
balances. In 2005, those checks and balances for the student-loan lending
market were stripped. It’s time to restore them.
Sam
Leonard is a bankruptcy and debt defense attorney at Leen and O’Sullivan in
Seattle.