Is Congress Enabling Growing Student Debt?

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According to new research from the Federal Reserve Bank of New York, Americans 60 and older still owe about $36 billion in student loans.  More than 10 percent of those loans are delinquent, which can lead to Social Security checks being garnished and debt collectors harassing borrowers in their 80s over student loans that are decades old.

The fact that older Americans remain burdened with student loans when you’d expect that they would be enjoying retirement brings to light the challenges that borrowers of all ages face with student debt.  Students usually go to college in an attempt to get a better job or to improve their lives somehow. Unfortunately, due to the poor economy and high unemployment rates, an increasing number of student borrowers end up with overwhelming debt burdens that some can never resolve. The average borrower graduating from a public or private institution owes an unprecedented $25,250.

In another new study by the National Association of Consumer Bankruptcy Attorneys (NACBA), American student borrowing exceeded $100 billion in 2010, and total outstanding student loans exceeded $1 trillion last year.  Specifically, private student loans have been proven to be one of the riskiest ways to pay for college.  Typically private student loans are too high for borrowers to repay or are in amounts far in excess of the student’s ability to repay with anticipated income.  They actually resemble credit cards rather than a type of financial aid.  Unlike federal student loans, private student loans do not generally have the same consumer protections such as military deferments, forbearance in economic hardships, fixed, affordable interest rates, and manageable repayment options. 

With $67 billion of student loans in default, some consumer advocates have criticized Congress for being slow to help struggling students and in some ways burdening borrowers even more.  So, what is the biggest obstacle in dealing with student loan debt?  According to the NACBA study, 82% of bankruptcy attorneys said they see the limited availability of student loan discharge in bankruptcy as a “big problem.”  Unfortunately, federal student loans have been ineligible for discharge when filing bankruptcy for two decades. By eliminating bankruptcy as an option, Congress chose to pass legislation to make it increasingly more difficult for student loan borrowers to get a fresh start. It was only in 2005 that a law was passed to ban private student loans from bankruptcy discharge.  Currently, bankruptcy relief is now available for student loan debtors only through the arbitrary and often costly system that requires a debtor to show that he or she will suffer an undue hardship if forced to repay the loan.  95% of bankruptcy attorneys polled in the NACBA study responded that few student loan debtors are seen as having any chance of obtaining a discharge as a result of undue hardship.

Some in Congress are taking action to tackle the burden of student debt.  U.S. Senator Dick Durbin (IL) introduced legislation in 2011 , the Fairness for Struggling Students Act (S. 1102), to allow private student loans to be eligible for discharge in bankruptcy.  Yesterday, Senator Durbin also introduced a bill, along with Tom Harkin (IA), which would mandate that schools counsel students before they sign on to private student loan debt and inform them if they have any untapped federal loan eligibility. The Know Before You Owe Act of 2012 would also require the prospective borrower’s school to confirm the student’s enrollment status, cost of attendance and estimated federal financial aid assistance before the private student loan is approved. 

On the House side, Representative Hansen Clarke (MI-13) recently introduced a bill, The Student Loan Forgiveness Act of 2012 (H.R. 4170), which would forgive the debt of student borrowers who make 10 years of payments, cap interest rates and protect borrowers who suffer financial hardship, such as unemployment. NACA members have started a petition in support of Rep. Clarke’s bill.

In addition, Senator Jack Reed (RI) and Representative Joe Courtney, (CT-2) both back legislation that would prevent interest rates on student loans from doubling this year. The bills would permanently cap Stafford student loan interest rates at 3.4 percent for low-and moderate-income students.

President Obama has also declared his commitment to ease the burdens of student debts. In October of last year, Obama proposed an accelerated income-based repayment program, called “Pay As You Earn,” as well as new incentives for states to contain costs. While these are important steps by the Administration, in order to properly address the student debt problem, Congress needs to move quickly on these important student loan initiatives introduced in the House and Senate.

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Editor’s note:  The petition referenced in the blog in support of The Student Loan Forgiveness Act of 2012 was created by Robert Applebaum who is not a current NACA member.