Written by: Zeeshan Aleem
Published: 09/24/2009

House Panel Holds Hearing on Bankruptcy and Educational Debt

On Wednesday, September 23, the House Judiciary Committee held a hearing on bankruptcy law as it applies to private student loans. Steve Cohen (D-TN), Chairman of the House Subcommittee on Commercial and Administrative Law, led the hearing which centered on the viability of altering legislation that currently bars debtors from discharging private student loans when filing for bankruptcy.

Democratic lawmakers are inclined toward relaxing the conditions for discharging private loans. In 2005, private student loans were accorded a status that marks them as a form of unforgivable debt in bankruptcy – except when they constitute "undue hardship." Cohen said that lenders received "favorable, unusual treatment" from Congress, and that their lack of consumer protections suggests that private loans may now have "costs that outweigh benefits" for students.

Rep. Danny Davis (D- IL) testified before the committee in favor of allowing for the discharging of private student loans in bankruptcy, noting the disproportionate burdens the current laws place on African Americans. Last year, Davis proposed an amendment to the Higher Education Act that would have done just that, but ultimately it was excluded from the final bill.

Lauren Asher, president of the Institute for College Access and Success, testified that there are few practical differences between using private student loans or credit cards to pay for tuition. She remarked that if credit card debt can be relieved in bankruptcy, then private student loans should be as well.

"Your yacht is dischargeable in bankruptcy, your vacation place is dischargeable in bankruptcy … then you run into these people trying to get an education, who go to a bankruptcy judge and no, the door is closed," said Rep. John Conyers (D-MI), Chairman of the House Judiciary Committee.

Trent Franks (R-AZ), the ranking member of the subcommittee, feared that easing the restrictions on discharging private student loan debt would open the system up to abuse. "The real culprit here is the rising cost of education," he said.

While the various members of the subcommittee had differing views on changing the status of private student loans, there seemed to be agreement between them – and all the experts who testified – that developing a clear definition of "undue hardship" was an important issue to attend to in future legislation on discharging educational debt.

Prior to the hearing, AACRAO submitted written testimony on the treatment of private educational loans in bankruptcy. The association urged the subcommittee to examine a complete exclusion of private educational loans from the special bankruptcy treatment previously reserved only for federal loans. To view the full text of AACRAO's testimony, click here.

Related Links:

Testimony on Dischargeability of Private Educational Loans
http://www.aacrao.org/federal_relations/AACRAO_AASCU_NACAC_Testimony.pdf

Inside Higher Ed
http://www.insidehighered.com/news/2009/09/24/bankruptcy

Readers had the following comment(s) on this article:
09/25/2009	Annette Douglas, Degree Audit Specialist, El Centro College, skylow75204@yahoo.com
I believe the debt incurred by students should be relieved in bankruptcy. However, it should not be totally forgiven because the money is owed. The cost of higher education in enormous and the IRS can currently recover some of the debt. I also feel that higher education institutions should realize that better educated individuals benefit the entire society and thus students shouldn't have to go broke to secure higher learning. I am currently in dispute with a university for exorbitant charges tacked on to my account at the completion of my program of study. For several months contact with the school has been back and forth with accounting personnel telling me one thing and financial aid another. Each has strikingly different balances. I don't want to re-pay anymore than I owe, so I think litigation will be my only recourse. The situation is like being between a rock and a hard place. It's unfortunate that there's not much more average citizens can do to resolve the problem. Something really needs to be done.