Will Democrat bankruptcy bill end opportunity in the Land of Opportunity?

David Storobin
In June 2011, a bill was introduced by Democratic members of both the United States Senate and the House of Representatives that will again allow students to declare bankruptcy on private student loans under similar rules as other forms of personal debt. This was allowed between 1978 and 2005 when the law was changed. Congressmen and Senators who support this legislation believe that present-day law has the effect of dissuading young people from pursuing higher education due to a threat of permanent financial ruin that stems from hundreds of thousands of dollars in education debt that cannot ever be erased.

Opponents, meanwhile, argue that borrowers should be responsible for their own debt, in particular young people with higher education degrees whose long-term job prospects are favorable. They argue that it would be unfair for the government to protect itself against bankruptcy, while exposing private enterprise engaged in identical banking practices.

Due to the skyrocketing of tuition in nearly every college and university, private student loans have become some of the fastest-growing and most profitable in the student loan industry. Students can no longer cover their tuition with government loans and grants, and are forced to reach out to borrow from private lending institutions.

Because these loans are unsecured - unlike, for instance, a house upon which a bank can declare foreclosure should the owner be unable to pay - interest on these loans is higher than that on a mortgage and other secured debt. Financial and bankruptcy experts, including
New York bankruptcy attorneys we've spoken to, say that allowing borrowers to declare bankruptcy on unsecured debt will almost definitely result in even higher interest rates on everyone, as lenders seek to re-distribute the cost of non-payment by some upon all the others who do pay off their loans.

Interest rates and other fees on student loans will probably get as high as those of credit cards or the maximum allowed under the state's usury laws. It will also become more difficult for students to get their school loans approved, particularly for students who cannot rely on the help of their parents or spouse to co-sign for them because such practice will probably become common place on unsecured loans given to teenagers and young adults.

In the past, this was not a significant issue because government grants and loans normally covered all or at least a large percentage of student loans. But with tuition rising to $40,000 a year at many non-elite institutions and even higher in the nation's top schools, private loans have become a necessity for all but a few who have wealthy parents willing to pay for their education.

Financial experts warn that politicians should consider the unintended consequences of their actions. While everyone may want to help young people struggling with their loans, shifting the costs from those who don't want to pay to those who do, will make the system more unfair and that much less affordable. It may also mean that "The Land Of Opportunity" will close the primary way for poor people to move up - by getting an education.

In June 2011, a bill was introduced by Democratic members of both the United States Senate and the House of Representatives that will again allow students to declare bankruptcy on private student loans under similar rules as other forms of personal debt. This was allowed between 1978 and 2005 when the law was changed. Congressmen and Senators who support this legislation believe that present-day law has the effect of dissuading young people from pursuing higher education due to a threat of permanent financial ruin that stems from hundreds of thousands of dollars in education debt that cannot ever be erased.

Opponents, meanwhile, argue that borrowers should be responsible for their own debt, in particular young people with higher education degrees whose long-term job prospects are favorable. They argue that it would be unfair for the government to protect itself against bankruptcy, while exposing private enterprise engaged in identical banking practices.

Due to the skyrocketing of tuition in nearly every college and university, private student loans have become some of the fastest-growing and most profitable in the student loan industry. Students can no longer cover their tuition with government loans and grants, and are forced to reach out to borrow from private lending institutions.

Because these loans are unsecured - unlike, for instance, a house upon which a bank can declare foreclosure should the owner be unable to pay - interest on these loans is higher than that on a mortgage and other secured debt. Financial and bankruptcy experts, including
New York bankruptcy attorneys we've spoken to, say that allowing borrowers to declare bankruptcy on unsecured debt will almost definitely result in even higher interest rates on everyone, as lenders seek to re-distribute the cost of non-payment by some upon all the others who do pay off their loans.

Interest rates and other fees on student loans will probably get as high as those of credit cards or the maximum allowed under the state's usury laws. It will also become more difficult for students to get their school loans approved, particularly for students who cannot rely on the help of their parents or spouse to co-sign for them because such practice will probably become common place on unsecured loans given to teenagers and young adults.

In the past, this was not a significant issue because government grants and loans normally covered all or at least a large percentage of student loans. But with tuition rising to $40,000 a year at many non-elite institutions and even higher in the nation's top schools, private loans have become a necessity for all but a few who have wealthy parents willing to pay for their education.

Financial experts warn that politicians should consider the unintended consequences of their actions. While everyone may want to help young people struggling with their loans, shifting the costs from those who don't want to pay to those who do, will make the system more unfair and that much less affordable. It may also mean that "The Land Of Opportunity" will close the primary way for poor people to move up - by getting an education.