The inability of Americans to discharge student loan debt in bankruptcy proceedings creates a system of indebtedness like the one that existed during the era of Charles Dickens, when people who couldn’t afford to pay their debts were routinely tossed into prisons, a top Democratic senator declared this week.
Illinois Sen. Dick Durbin (D) has introduced legislation that would make it easier to discharge private student debt in bankruptcy proceedings, much as people are able to do with debt from mortgages, credit cards, and other loans. But even as Americans are collectively swimming in nearly a trillion dollars of student debt — $150 billion of which is owed to private lenders — the legislation has gone nowhere, leaving them crushed by debt they often can’t repay, Durbin said:
How can it be that the deck is so stacked against students who borrowed to go through school? How can “certainty of hopelessness” be the standard for borrowers to obtain any relief in bankruptcy court. This harkens back to the debtors prisons of Europe and England. Charles Dickens would have a ball with this standard.
Congress needs to address this issue. Right now there is $150 billion in outstanding private student loan debt that is crushing many borrowers -– $150 billion. I have a bill, the Fairness for Struggling Students Act, that would once again permit private student loans to be discharged in bankruptcy as they were before 2005. Mark my words, there is no good reason why private student loans should be treated differently in bankruptcy from any other type of private unsecured debt.
Nearly every other type of debt is easily discharged in bankruptcy, but student loan debt, particularly that which is acquired through private lenders and for-profit colleges, is not, even as the total amount of student debt held by Americans has ballooned in recent decades. Undoing those restrictions as Durbin suggests would do away with what The Roosevelt Institute’s Mike Konczal called “a giant subsidy to private agents” who lend to students.
The growth in debt has had severe effects on the nation’s economy, and those effects could pose an even bigger risk in the future. The growth in student debt has held back the housing recovery since the Great Recession, and a growing number of America’s elderly are being crushed by debt they took on to help family members attend college. The securitization of student loans by big banks has made it possible that loans could be the next “debt bomb” facing the economy, similar in structure (if not in size) to the mortgage bubble that burst before the recession.
Given that 80 percent of bankruptcy lawyers have reported a “substantial increase” in clients struggling with student debt, Durbin’s legislation to undo bankruptcy restrictions could reduce the threat posed by the growing mass of student debt Americans hold. (HT: Kay Steiger)