Rethinking Bankruptcy and Student Loans
As Congress and the White House move to alter bankruptcy code to make it more equitable to consumers, a House subcommittee began a reconsideration Wednesday of how bankruptcy law treats private student loan debt. Rep. Steve Cohen (D-Tenn.), chair of the House Judiciary Subcommittee on Commercial and Administrative Law, held a hearing to initiate legislation reversing a 2005 change in federal bankruptcy law that, he said, gave private student loan lenders a “favorable, unusual” advantage over borrowers, as well as in comparison to the issuers of most other kinds of consumer loans.
Bankruptcy law bars virtually all borrowers from discharging their private student loan debt, even as most other forms of consumer debt -- including auto loans, credit card debt and mortgages -- can be discharged through bankruptcy proceedings. The only exceptions are made in cases of “undue hardship.”
The only chance borrowers have to discharge their private student loans during bankruptcy proceedings comes by being able to demonstrate “undue hardship,” a term that has not been concretely defined by Congress and is up for varied interpretations by bankruptcy judges. Rafael I. Pardo, an associate professor at the Seattle University School of Law who has done extensive studies on student loans and their discharge in bankruptcy, called on Congress “to clarify the undue hardship standard.” [Inside Higher Ed]
