Obama's Disappointing Omission
Yesterday, Sen. Barack Obama (D-Ill.) unveiled plans to rewrite federal bankruptcy laws to make it easier for financially-strapped senior citizens, military families, and individuals suffering medical emergencies to get relief from debilitating debts. While we are pleased that the presumptive Democratic presidential nominee is proposing to overhaul the 2005 bankruptcy bill, which was a glaring example of politicians putting corporate interests over regular people, we urge him not to forget another group who desperately needs help -- borrowers who have taken on unmanageable levels of private student debt and now find themselves in severe financial distress.
As we have noted previously, Congress tucked a provision into that bankruptcy bill making it extremely difficult for borrowers to discharge private student loans. That special provision was added in a secret conference committee, without any public debate or notice.
For most unsecured debt, a borrower who runs into difficulty can file for Chapter 7 liquidation or Chapter 13 reorganization, so a judge can sort out the appropriate treatment of various loans. But there is a short list of debts that the law subjects to a different status, allowing discharge in only the most extreme circumstances. The government, for example, makes it nearly impossible for people to escape child support responsibilities, overdue taxes, and criminal fines.
Federal student loans also can't be discharged. There's at least some justification for providing federal loans that status since they are backed by taxpayer dollars and come with borrower protections in cases of economic hardship, unemployment, death, and disability. But there is no good reason for private loans to be accorded the harshest bankruptcy status.
To be clear, we're not advocating allowing borrowers to claim bankruptcy willy nilly in order to avoid student loan repayment. Our view is that private student loans should not be treated any differently than other forms of consumer debt when it comes to bankruptcy. Individuals who borrow private loans are trying to better their lives. They certainly shouldn't be treated more harshly than those who rack up credit card debt at the mall.
Shielding private loans from bankruptcy in most circumstances means that repayment demands extend essentially forever, leaving even the most destitute borrowers with no way out. Bankruptcy exemption also makes private student loan providers less cautious about peddling high cost loans to low-income and working-class students who may never be able to repay them. In other words, it promotes the kind of predatory lending that Sallie Mae and some other loan companies have been engaged in at scandal-ridden, for-profit trade schools. Treating private loans like other forms of unsecured debt would at least cause lenders to think twice before providing high-interest loans to people who can ill-afford to take on this debt.
Speaking on Tuesday at a high school in Powder Springs, Ga., Obama attacked his presumptive Republican opponent Sen. John McCain (R-Ariz.) for supporting the 2005 bankruptcy bill. "Sen. McCain does not believe the government has a real role to play in protecting Americans from unscrupulous lending practices," Obama said. "He would continue to allow the banks and credit card companies to tilt the playing field in their favor, at the expense of hardworking Americans."
If Obama is serious about protecting people from "unscrupulous lending practices," he should come to the aid of financially-distressed private student loan borrowers. For that matter, if McCain wants to prove Obama wrong and show that he is not beholden to the lending industry, he should offer a helping hand to these borrowers as well.
So far, neither Democrats nor Republicans in Congress have shown that they have the guts to stand up to the student loan industry and do what is right. Such change may only be possible with presidential leadership. Obama and McCain, are you up for it?