Hey, tell that to creditors, who have been real beneficiaries of student loans & "reforms" that have made debts more onerous:
***** Chronicle of Higher Education May 22, 1998 SECTION: GOVERNMENT & POLITICS; Pg. A38 HEADLINE: Debate Flares Over How Bankruptcy Law Should Apply to Student Borrowers; A House panel's plan pits some college officials and lenders against advocates of low-income students BYLINE: Stephen Burd DATELINE: Washington
In their search for funds to pay for a bill that would extend the Higher Education Act, Congressional leaders have reignited a debate over how the government should treat student-loan borrowers who try to free themselves of debt by declaring bankruptcy.
The fight, which has surfaced repeatedly over the past two decades, pits advocates for low-income students against some college administrators, government officials, and lenders who fear for the fiscal integrity of the student-loan program. The latter group believes that many people who seek refuge in bankruptcy are deadbeat borrowers, who take out student loans without having any intention of repaying them.
"I have seen students abuse the bankruptcy system, and the abuses seem to be increasing," Eben Sutton, an accountant who manages the University of Idaho's Perkins Loan Program, wrote in an e-mail message to an Internet discussion group for aid administrators.
Irv Ackelsberg, a lawyer at Community Legal Services in Philadelphia, sees the issue differently. Most people who default on their loans are not deadbeats, he says, but are simply unable to repay.
"Over the years, I have represented numerous borrowers in bankruptcy, who made a false start at higher education, and who, for reasons such as family responsibilities or economic pressures, were forced to abandon their dreams of higher education," he wrote in a letter to House Republican leaders. "To take away the bankruptcy option for these individuals would cause them needless hardships."
The fight over the bankruptcy measures took on new life this month, when House Republicans began looking for ways to pay for a provision in the Higher Education Act legislation that would sharply reduce the interest rate that students pay on their loans.
The bill, which was overwhelming approved by the House this month, would lower the student-loan-interest rate by 0.8 of a percentage point, reduce the profit margin that banks now earn on the loans by 0.3 of a point, and make up the difference by creating a new government subsidy for banks.
The Congressional Budget Office estimates the new subsidy's cost to be $ 1.2-billion over five years. Republican leaders of the House Committee on Education and the Workforce, the panel that drafted the bill, have found money to cover about half of that estimate.
The House Budget Committee has promised to find the other half. One option it is considering is forbidding student-loan borrowers who sought baccalaureate or graduate degrees from ever discharging their debt by declaring bankruptcy.
Federal law already bars recipients of student loans from discharging their debt through bankruptcy in the first seven years after completing their studies.
A year ago, a national commission created by Congress to review the federal Bankruptcy Code argued that even the current restriction is too harsh, and urged lawmakers to drop it. The National Bankruptcy Review Commission contended that Congress had enacted the ban based on anecdotes rather than on hard evidence of widespread abuse by those seeking to avoid repayment.
Until the mid-1970s, federal student loans were treated the same as any other debt under bankruptcy law. However, the commission's report said, news stories about "soon-to-be rich professionals lining up for bankruptcy to do away with their student loans" helped build suspicion that the bankruptcy laws were being abused.
From 1976 to 1990, Congress tightened federal law, preventing most student-loan borrowers from discharging their debt through bankruptcy. The law does offer an exception if borrowers can prove that repaying the loans would cause them "undue hardship." However, courts rarely grant that exception, the commission said.
The commission said its review had found little evidence to suggest that its proposal would lead to great abuse. The report cited evidence from the 1970s, when borrowers could still discharge student-loan debt through bankruptcy. A 1977 study by the General Accounting Office found that fewer than 1 per cent of all matured student loans had been discharged in bankruptcy.
The proposal to ease the restrictions on student-loan borrowers was among the most controversial of the commission's 170 recommendations. It was vehemently attacked by the Clinton Administration and by lenders, who warned that easing the law would cause an explosion of bankruptcy claims.
Bills now being considered in Congress to alter the bankruptcy laws have ignored the panel's recommendation on student loans.
The Clinton Administration, for its part, says the number of people whose student loans have been erased by bankruptcy has already exploded. According to the Education Department, 35,000 borrowers discharged their loans through bankruptcy in 1997, costing the government about $ 150-million.
White House officials say many of those loans were discharged using the "undue hardship" claim. The Administration has recommended -- in its proposal to extend the Higher Education Act and in its fiscal-1999 budget plan -- that Congress prohibit the discharge of student loans in bankruptcy.
Disadvantaged borrowers, Administration officials argue, have better options to relieve their debt burden than bankruptcy, which can have long-lasting, negative consequences. For example, borrowers can take advantage of flexible repayment plans now offered in both the guaranteed- and the direct-loan programs, they say.
Mr. Sutton, the Idaho accountant, agrees, noting that the university has been alerted to 32 active student-loan bankruptcy cases involving its students or alumni -- the majority of which are "questionable," he says.
"These are mostly students who took out loans knowing they would never pay them back," he says.
Mr. Ackelsberg responds, however, that such a statement reflects a stereotype that has led to restrictions on bankruptcy, which have, in turn, hurt low-income citizens.
If House lawmakers decide to tighten restrictions on bankruptcy claims for student-loan borrowers as a way of paying for the higher-education bill, Mr. Ackelsberg says, it should at least limit the restrictions to borrowers who have successfully completed their baccalaureate or graduate degrees.
Those who have dropped out of college should not be penalized, he says, adding that the government wouldn't be able to get much money out of them, anyway.
"Having received no credential, and no new employment opportunity, they are not likely, after the passage of seven years, to provide meaningful repayments," he said. *****
Yoshie