(Reuters) – Two changes to the U.S. consumer bankruptcy process could help some of the most trapped student loan borrowers free themselves from a modern-day debtors’ prison.
President Barack Obama last week directed three U.S. government agencies – the Department of the Treasury and Education as well as the Consumer Financial Protection Bureau – to report by Oct. 1 whether bankruptcy or other laws and regulations should be revised for student loans.
One change that is long overdue, and suggested by a group of Democratic senators who introduced a bill last Friday, would be to make private student loans erasable in bankruptcy court.
Led by Senator Dick Durban of Illinois, the lawmakers introduced The Fairness for Struggling Students Act of 2015 to revoke private student loans’ special treatment. But the bill is expected to have little chance of passage in the Republican-controlled Congress.
That is unfortunate since the 2005 law that gave private student loans parity with federal student loans is difficult to defend.
In contrast to federal student loans, private education loans do not use taxpayer funds or have government guarantees. Federal student loans also do not use credit scores or vary interest rates to reflect default risk, while private lenders do.
Private lenders typically require creditworthy co-signers, while federal loans do not.
In other words, private student lenders can and do employ methods that compensate them for the risks they take. Yet their loans get a much higher level of protection in bankruptcy proceedings than mortgages, auto loans, credit cards or any other privately-issued debt.
Another much-needed change, which likely would not require congressional action, would be to call off the watchdog-turned-attack-dog that fights the most troubled debtors’ efforts to erase federal student loans.
Currently, very few people are able to erase any student loans in bankruptcy court, no matter how dire their financial or personal situations. Debtors must prove not only that they cannot maintain a minimal standard of living while paying their debt, but that their situations will not improve.
The few borrowers who try to prove their financial desperation typically meet aggressive legal challenges from the Educational Credit Management Corporation, a private nonprofit hired by the federal government to monitor bankruptcy cases.
The National Consumer Law Center has denounced ECMC’s “over-the-top, hardball tactics,” while an investigation by The New York Times found the agency “has veered more than occasionally into dubious terrain.”
A New Hampshire bankruptcy judge sanctioned ECMC for abusing the bankruptcy process by pursuing a woman who had already paid off her student loans. In another case, ECMC appealed a partial student loan discharge for a victim of pancreatic cancer and numerous other ailments, arguing that she failed to prove that a recurrence of the notoriously lethal cancer was “a probability, rather than a mere possibility,” court records show.
Advocates for overwhelmed student borrowers say ECMC’s relentless assaults and appeals drive up the already-daunting costs of filing for education debt relief.
The agency says it is trying to recoup as much money for taxpayers as possible. “Our employees in the loan-servicing side of our company go into work every day focused on two things: doing the job we are contracted to do on behalf of taxpayers and the federal government, and treating every student with the respect, empathy and dignity they deserve,” ECMC Group president and CEO David Hawn said in an emailed statement.
In fact, ECMC was created in 1994 because another agency that guaranteed federal student loans collapsed after huge numbers of borrowers ignored their debts. But numerous reforms since then have made it much harder to walk away from education debt and provided more income-based repayment options for struggling debtors.
So those landing in bankruptcy court now are the “blood from a stone” cases with little if any money to be recouped. The bankruptcy standard has been set so high that there is no real need to pursue appeals with such fervor.
Bankruptcy law does not allow student loans to be erased in a regular filing. Instead, attempts to discharge education debt require an additional filing known as an “adversary proceeding.”
A study published in the American Bankruptcy Law Journal found that only 213 of the 170,000 people with student loans who filed for bankruptcy in 2007 took that extra step. Of those, 51 won full discharges of their loans and 30 received partial discharges.
Adversary proceedings require substantially more work for attorneys who are employed by already cash-strapped clients. Those who win discharges typically either represent themselves or have free legal help, bankruptcy attorneys note.
Given these high hurdles, ECMC’s bellicose approach is simply overkill. If the federal government wants to continue using its services, the agency should be required to use common sense – and common decency – before pursuing hapless borrowers.
(The author is a Reuters columnist. The opinions expressed are her own.)