Hundreds of thousands of Americans who fall behind in their bills and seek refuge by filing for bankruptcy get a distressing surprise: If they are willing to ruin their credit for years, they can walk away from their houses, turn in their cars, and wipe out their credit card bills, but they typically can't erase a penny of their student debts.
Of course, the vast majority of Americans who use loans to pay for college get jobs and pay their debts. But the recent economic troubles and spike in unemployment have caused thousands of graduates to fall behind on their student loan payments. More than 20 percent of students who took out expensive private loans in the last several years to pay for tuition at some for-profit colleges have defaulted. The government reports that 6.7 percent of those who took federal student loans in 2007 have already defaulted, up from 4.6 percent in 2005. And many analysts predict more Americans will have trouble paying their student loan bills in the coming months.
Recent developments in
"In this economy, we want to be encouraging people to invest in their education and their future," Franken said in a press release. "That's why it is more important than ever for people to be able to get a fresh start."
If the plan wins Congressional approval, it would mark the third big improvement in student loans in the last year, student groups say.
Last summer, the federal government started allowing those with federal student loans to cap their payments below 15 percent of their income, and it promised to forgive some of the debts of public servants, and those with low incomes. Earlier this year,
In March, the
Now that federal borrowers have a chance at relief, attention is turning to the estimated 17 million Americans currently paying down private student loans.
A spokesperson for
Academic researchers also predict mixed results. Making it easier for to reduce or eliminate private student loans could encourage more people to file for bankruptcy, found Colgate economist
The history of student loans also casts some surprising lights on the bankruptcy rule's possible impact. Until the last decade or so, just about the only college tuition loans generally available were those backed by the federal government, such as Stafford and Perkins loans. Since federally backed student loans were made to all citizens, without regard to credit, at comparatively low rates,
But the government tried to rein student borrowing by only allowing students to take out a few thousand dollars a year, even though colleges' tuitions were skyrocketing. In the 1990s, a growing number of banks, and other for-profit lenders started making private student loans--which were business transactions without any government involvement. When people with private loans found themselves in financial trouble and filed for bankruptcy, judges lumped those with other private debts such as credit cards, and often wiped the slate clean.
That changed in 2005, when an anonymous Congressman--no one has publicly claimed credit yet--slipped an amendment into a bankruptcy reform bill that made all private student loans, even those already made, as inescapable as federal student loans.
Now, graduates who get into financial difficulty can apply for income-based repayment on their federal loans to lower their bills without defaulting. But the estimated 17 million Americans with private educational loans still can only try to negotiate with lenders, or persuade a bankruptcy judge that they have an "undue hardship."
Unfortunately, neither of those options holds out much hope for those in trouble. Lenders have been at least as loathe to help troubled student borrowers as they have to help those with unaffordable mortgages, lawyers and borrowers say.
Supporters of the bankruptcy reform proposal say giving unemployed and struggling Americans a chance to start fresh will have little downside. Since interest rates didn't drop when the law was changed in lenders' favor in 2005, there's no justification for them to jump if the law is changed back, the supporters argue.
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