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Ultimately, the effect of denying student borrowers a protection guaranteed to most other consumers, is that, when it comes time to clearing the slate, student borrowers are treated more harshly even than someone who, say, drives drunk and kills a pedestrian — a type of debt that could be discharged in bankruptcy.
"The non-discharge-ability of student loans is a moral outrage," said Barmak Nassirian of the American Association of Collegiate Lenders and Registrars. "Seventeen-, eighteen-, nineteen-year-olds, for whom this is way too long-lasting a decision, don't know that when they sign a loan, regardless of what happens to them in life, that piece paper is not a promissory note — it is an instrument of indenture."
Nassirian believes that the exemption creates a system of perverse incentives, where lenders lack the incentive to consider who they lend to, because they are assured of being able to collect. "When you make a loan non-dischargeable, you insulate lenders against any kind economic rationality in terms of should this loan be made," he said. "It reminds you of sub-prime mortgages."
In place of bankruptcy protection, borrowers of federal loans have a number of repayment options. One, known as Income Based Repayment, offers repayment options tied to income level. Another option, called Public Service Loan Forgiveness, offers discharges of federal loans after ten years working in "public service" jobs such as government or nonprofits.
With Income Based Repayment, however, interest still accrues on the principal. In Warner's case, she has already been paying her loans for two decades; if she were to choose the Income Based Repayment plan, she'd be paying off her debt until she was a septuagenarian.
To discharge her debt, Warner had only one option: She would have to file for an adversary proceeding requiring her to prove that repaying her student loans would cause "undue hardship." Congress never specified what constitutes undue hardship, and the standard applied is known as the Brunner test. The first part of the three-part test required her to prove that she could not meet a minimum standard of living if forced to make repayments on her loan. The second part required her to prove that her situation would never improve. The third stipulated that she had to have made "good faith" efforts to repay.
But the process wasn't easy. "I couldn't find a bankruptcy attorney to take my case," said Warner. "They said, 'You'll be paying me to lose.' They said I had no shot."
Warner went ahead with the help of a friend and a book called Bankrupt Your Loans: And Other Discharge Strategies. Unfortunately, the predictions proved true. Warner's case was dismissed this year in a one-page summary judgment. Lawyers working for the Department of Justice argued that Warner failed the third part of the hardship test because the unpaid videography work she had done for five years constituted a bad faith effort to repay her loan.
"Now I'm just waiting for them to come get me," she said. "There's nothing else I can do."
Federal bankruptcy protections seem to be a long way off. Most of the attention lately has been on private loans, whose interest rates are higher and more variable, and whose borrowers have fewer options to get back into good standing when they get into trouble. Student debt counselors typically advise students to exhaust their federal loan options before turning to private loans. Yet as tuition increases, more and more students have to, so advocates for student borrowers have concentrated on private loans, while leaving the status quo for federal loans largely unquestioned. The Oakland-based Institute for College Access and Success, the largest advocate for student borrowers, has made the restoration of bankruptcy for private student loans one of its main focuses, while keeping mostly quiet on the subject of federal bankruptcy protections.
"That's where the most harm may be done to students, because private loan borrowers have no other recourse," said Edie Irons, spokeswoman for the Institute for College Access and Success. "They are completely at the mercy of their lenders. There are no deferments; there are no income-based repayment plans, no loan-forgiveness options. Even if a borrower dies or becomes disabled, or school closes, they or their families will still be on the hook for those loans."
The persistence of loan debt after death is one injustice that may be changing, however. In May, a bill called the Christopher Bryski Student Loan Protection Act was introduced in Congress. If passed, it would increase transparency and disclosure requirements for private loans, and provide for relief if the borrower died.
While it's true that private loans are more dangerous in one sense, private lenders lack the extensive powers of collection that make defaulted federal debt so onerous for borrowers. There is little momentum for this kind of change, though, recently, Sallie Mae has endorsed a restoration of bankruptcy protections for federal student loans — if students have made good-faith efforts to repay them for five to seven years.
But that's not good enough, say some student advocates, who point out that default can happen quickly, and that five to seven years is too long to be forced to wait to receive forgiveness. Further help may end up coming from within their own ranks.
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