Student Loans

by on

Factual Findings in Student Loan Discharge Case Reviewed for Clear Error

Dischargeability of student loans is often determined by application of the test set forth in 1987 case of Brunner v. New York Higher Education Services Corp., 831 F.2d 395 (2d Cir.). The Ninth Circuit recently discussed the proper standard of review when the third prong of that test—good faith—is at issue. Hedlund v. ECMC, No. 12-35258 (9th Cir. May 22, 2013). [Read more…] about Factual Findings in Student Loan Discharge Case Reviewed for Clear Error

by on

Fairness for Struggling Students Act

Illinois Senator Richard Durbin began the 113th Congress by reintroducing the Fairness for Struggling Students Act of 2013, S. 114, proposing to make private student loans, like other consumer debts, dischargeable in bankruptcy. In presenting the legislation, Senator Durbin said:

The first two pieces of legislation I will introduce this Congress deal with what I think is one of the biggest threats to millions of working families – the growing student loan debt crisis.  Too many Americans are carrying around mortgage-sized student loan debt that forces them to put off major life decisions like buying a home or starting a family.  It’s not only young people facing this crisis, it is parents, siblings, and even grandparents who co-signed private loans long ago and are still making payments decades later.  It’s time for action.  We can no longer sit by while this student debt bomb keeps ticking.”

Federal student loans have been essentially non-dischargeable since 1978 but it was not until the Bankruptcy Code underwent upheaval in 2005 that private student loans were accorded the same favored treatment. Although private student loans comprise only about 20% of the total student loan debt, private loans tend to be substantially more onerous for borrowers. They typically have higher interest rates, limited or no availability of deferment or forbearance, and no income-based repayment plans. In addition, they are not subject to the consumer protections in place for federal student loans.

Senators Jack Reed (D-R.I.), Sheldon Whitehouse (D-R.I.), Al Franken (D. MN), Tom Harkin (D-IA), and Elizabeth Warren (D-MA), are co-sponsors of the bill. Other organizations that have publically called on Congress to amend student loan treatment in bankruptcy are the American Association of University Women, the Consumer Financial Protection Bureau, the U.S. Department of Education, The Institute for College Access and Success, and Sallie Mae.

NACBA has actively fought for a return to pre-2005 treatment of private student loans and NACBA members have an opportunity to make their voices heard at the 2013 Capitol Hill Meeting in Washington on February 26-27. You can register for this event through the NACBA website, www.NACBA.org.

by on

Debtor May Not Discriminate in Favor of Student Loan Creditor

Substituting its judgment for that of the Bankruptcy Court, the court for the Eastern District of Virginia found that the debtor’s chapter 13 plan should not have been confirmed where it proposed to treat her student loan outside the plan. Gorman v. Birts (In re Birts), No. 12-427 (E.D. Va. August 1, 2012). Under her plan, as proposed, the debtor would have maintained her monthly payments on her student loan outside the plan while paying 7% to unsecured creditors within the plan. [Read more…] about Debtor May Not Discriminate in Favor of Student Loan Creditor

by on

Report on Student Loan Discharge in Bankruptcy

The Consumer Financial Protection Bureau and the Department of Education have released a report on private student loans, found at HERE.

The report finds that the 2005 BAPCPA law restricting bankruptcy protection for student loans coincided with rapid growth in questionable lending practices, compounding the risk to student borrowers. Although the restriction on bankruptcy discharge applies to all student loans, private student loans generally lack the intrinsic flexibility that permits federal student loan debtors to adjust their repayment based on income. The report finds little to no evidence that restricting bankruptcy rights improved either loan prices or access to credit. The report noted that the bankruptcy process itself, with its bad faith considerations, means testing, and attorney accountability, all protect against the use of bankruptcy to unfairly defeat private student loan creditors.

Both the CFPB and the Education Department recommend in the report that Congress revisit the 2005 law restricting bankruptcy protection for private student loans, stating:

“As noted in the report, several bodies were unable to find any systematic abuse of the bankruptcy code in seeking student loan discharges. Additionally, we were unable to find strong evidence that the 2005 changes to the bankruptcy code caused prices to decline or access to credit to increase significantly. If Congress concludes that the 2005 changes did not meet their overall policy goals, it would be prudent to consider modifying the code in light of the impact on young borrowers in challenging labor market conditions.”