This past Saturday, Sen. Elizabeth Warren (D-Mass.) delivered a speech at the Education Writers Association’s Conference on Higher Education at Northeastern University. Speaking on her main platform, student loans and economic equality, she called for the reform of the bankruptcy law’s extension into private student loans.
In 1978, the government passed legislation that makes federal loans ineligible for bankruptcy discharge, which eventually included private student loans, in 2005. In January, three Senate Democrats announced the Fairness For Struggling Students Act, which is designed to readjust the parameters for bankruptcy among those graduates with overwhelming student debt.
Sen. Dick Durbin (D-Ill.), one of the bill’s cosponsors, had his office release a statement shortly after the announcement:
In 2005, the law unjustifiably changed to give private student loans the same privileged bankruptcy treatment as government loans, even though private student loans have vastly different terms and fewer consumer protections. Today’s bill would restore the bankruptcy law, as it pertains to private student loans, to the language that was in place before 2005 so that privately issued student loans will once again be dischargeable in bankruptcy like nearly all other forms of private debt.
The parameters of federal students loans and other governments are vastly different, indeed. Federal loans have fixed interest rates, income-based repayment, and payment deferment options. Private loans, however, have interest rates that can go as high as 18 percent and there are very little deferment options.
Many prominent groups have endorsed the bill, including the Consumer Financial Protection Bureau, the U.S. Department of Education, and even Sallie Mae, one of the country’s most prominent private student loan lenders. The Fairness For Struggling Students Act, should it be passed, would not be applicable to federal loans, which account for over 80 percent of the $1 trillion student debt.
As it stands, the only way for a graduate to successfully file for a bankruptcy discharge of private student loans is by way of proving “undue hardship,” a very tedious and complicated process. The Brunner Test is a 1987 court case that is now the precedent for determining whether or not one’s student loans will cause them “undue hardship” if the debt is not dissolved.
In order to successfully apply the Brunner Test, the appellant must prove that he/she “cannot maintain, . . . a ‘minimal’ standard of living . . . if forced to pay the loans” and that the debtor “has made good faith efforts to repay the loans.”
However, Warren’s contention is that, although private loans can be dissolved by a court, the process is unnecessarily complex. The process only worsens the current situation and graduates are left to harbor the financial burden with minimal means.
“We stepped a piece at a time into making student loans impossible to deal with when a person hits financial crisis,” said Warren. “I’d like us to go a long way toward letting people deal with student loans the same way they deal with home mortgages and medical debts.”