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WASHINGTON Sen. Richard Durbin, D-Ill., renewed his push Thursday to allow bankruptcy judges to cram down private student loan debt, introducing a bill on the issue with 12 other Democrats.
March 12 -
The moves by two of the industrys biggest players come as regulators are pressuring lenders to offer more relief to distressed borrowers.
November 20 -
The Consumer Financial Protection Bureau's report on private student loans should prompt lenders, regulators and universities to take action to help troubled borrowers and prevent future defaults.
October 27 -
Congress should amend the bankruptcy code to permit borrowers to discharge student loan debt if their net monthly income is insufficient.
October 7
Congress has been making it harder for borrowers to get out of their student loan obligations since the late 1990s. But in the face of concerns about student loan debt's impact on individuals and the broader economy, lawmakers are facing growing pressure to ease the burden of repayment.
Policymakers have good reason to be worried about student debt. The total debt outstanding for students in the United States
Some leading
Current bankruptcy law permits the elimination of any student loan if repayment would be
The policy question for Congress and the public is whether to allow borrowers to discharge student debt even when repayment would not be an undue hardship. In considering this question, it's important to note that prior to 1998, borrowers could eliminate all of their student loans if the loans had been in repayment for at least seven years without regard to the undue hardship standard.
Several proposals now circulating in Congress seek to override the undue hardship test, but only for private student loans. In my view, these proposals are problematic for two reasons.
First, wiping out student loans with no questions asked raises serious moral hazard concerns. Under such an approach, surely some borrowers who could afford repayment would take advantage of the new law to skip out on their obligations to pay off student debt.
Second, and perhaps more important, limiting bankruptcy relief to private student loans and not government-backed student loans will provide negligible relief to most student borrowers.
Private student loans make up just 7.8% of the $1.18 trillion student loan market in the U.S., according to
A better approach would be to revisit the seven-year standard after which student loans can be discharged. If Congress were to resurrect this approach, bankruptcy could offer meaningful student debt relief.
A seven-year period is too long to encourage significant gaming of the bankruptcy system. And imposing this requirement, rather than giving student borrowers a carte blanche to use bankruptcy, would significantly reduce the government's potential revenue losses. Yet this standard would still provide helpful relief to overburdened borrowers.
John McMickle is the founder of JDM Public Strategies, a consulting firm that works in financial services and government relations. He served as the bankruptcy counsel to the U.S. Senate Judiciary Committee from 1994 to 2001. Follow him on Twitter