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Obama's Disappointing Omission

July 9, 2008 - 4:59pm

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?

Comments

I was really moved by your

I was really moved by your article, so I want to send along my response:

I'm stunned to finally find an article that says much of what my wife
and I have been saying for years. We both graduated from Washington
University (Ph.D., & MA, '99), went on to find good jobs in our fields
(including work at Harvard--great for building that CV), and still
can't keep up. Our pedigrees and work histories are fine. We've
declared bankruptcy, but still can't keep our heads above water, as
unlikely as this story sounds. And worse--there are MILLIONS of us
out there, up to our eyes in personal debt. We hear similar stories
almost every day now.

One result: WE will not be contributing to any economic recovery. We
simply don't have the money to put into the economy, and it looks like
we won't have the money regardless of our productivity.

What led to this current fiasco? After doing some research on the
subject I'm of the opinion that the creation of Sallie, Fannie, and
Freddie, occurring in a growing culture of corporatism (i.e., welfare
for the rich; privatization of profits and collectivization of risks)
have inflated the cost of everything, including education, housing,
and loans of every sort, while sticking everyday Americans with the
bill. The current system is rotten to the core, and the problem is
systemic throughout the loan industry (not just student loans). Lax
lending standards may be the only reason we were able to attend school
in the first place (though I doubt it), but now we're debt slaves.
This situation, faced by millions, helps nobody, not us, not our
economy, and not our fellow Americans, the vast majority of whom did
not benefit from increasingly lax standards in the lending industry
(and far too many of whom trusted that loan officers knew what they
were talking about).

Student Loans

Dan:

I just read your reply to Stephen Burd's article regarding the student loan industry. I belong to a group who is actively trying to make changes. Go to www.studentloanjustice.org. The founder has just written a book and several of us in San Francisco have recently successfully formed a group of lawyers from some top-name firms to begin filing suit against Sallie Mae and others.

Feel free to email me. We could use your input.

Sincerely,

Susan Mills

student loans

thank you for standing up - i agree totally with you. I am in the same boat and am drowning in student loan debt with Nelnet. They will not work with you and will garnish 30% of my wages. FAIR- i don't think so.

I am over $200,000 in student loan debt

I am over $200,000 in student loan debt. Living off the money to pay for school and to support my son. I did not receive child support. The original loan was about $85,000. Due to interest over the years and inability to meet the minimum payment and no 6 figure income that I thought I would be making after receiving a MBA. Who really cares?

Student loan

I'm in exact same situation as you are. I owe more on interest than the actual money I borrowed. I'm going crazy. I can't sleep at night. I'm divorced with no child support and no 6 figure income. I wish I'd never gone to finishing my college education.

I care because I can't get loans, and when I can get one the interest rate is at leat five times more than what it should be. I fear I won't be able to help my son with parent supplement loan when he gets ready to go to college. With all the accured interest on the loan I know I never be able to re-pay this loan. I hope the Obama's administration creats a program to help people like us.

Please let me know of any movement in this area.

Make your voice heard!

I would encourage everyone going through this (myself included) to organize or attend a Platform Meeting event in his/her hometown for the Obama Campaign. This is a portion of a message sent out via e-mail from his campaign, with instructions on how to proceed:

For two weeks in July, people all across America will hold Platform Meetings in their own communities to discuss the issues and share their input. The outcome of these meetings will be reviewed by the Drafting Committee as it creates the final Platform.

No political experience is required. Your thoughts and experiences are all that matter, and they will shape a platform that -- like this campaign -- is owned by the people.

Sign up to host or attend a Platform Meeting in your neighborhood:

http://my.barackobama.com/listening

This year, ordinary people like you will gather in their homes, community centers, places of worship, and even coffee shops to discuss the issues that matter to them and help decide what should be at the heart of the Democratic platform for change.

The input we get from these meetings will help shape the platform at the Democratic Convention in August.

Allow Private Loans with caveat

If Private loans are allowed to be discharged, there should be a requirement that the borrower took out the maximum amount allowed under the Direct Lending/FFELP program. Otherwise we will have a bunch of lenders bypassing Direct/FFELP in favor of private loans knowing they would be able to file bankruptcy. That was part of the reason why the government doesn't allow private loans to be discharged in the first place. Too many doctors/lawyers were runnnig up student loan debt & filing bankrupcty right after getting their degrees. Like the author said, FFEL/Direct loans should not be allowed to be discharged since the taxpayer already subsidizes those loans.

This is easily remedied. The

This is easily remedied. The government could place a requirement that private lenders be required to obtain school certification. For schools to certify a loan they should be required to make sure that the student has exhausted all other grant and federal student loan opportunities and provide credit counseling as well. If they decide to continue with this crazy bankruptcy protection they private lenders should be limited to only charging up to the federal student loan rate which is 6.8%. There is no reason for these companies to be charging such high rates when they are afforded protection from bankruptcy. These must be some give and take.

Careful about that Private Loan/Federal Loan Distinction

The Federal Government only subsidizes FFEL loan interest while a student is in school, not the loan. Therefore, the private/federal loan distinction is nearly irrelevant. I'm more than happy to repay my loans and a reasonable amount of interest at any point in time -- as long as the Department of Education wakes up and realizes that I should not and WILL NOT pay an amount equal to nearly 100% of the principal I borrowed in "collection fees and costs." I am not paying for Albert Lord's golf balls.

Careful about that borrower/nonborrower distinction

It could be you believe that very few government subsidies are available to borrowers under the American system of government student loans. The federal gov't subsidizes the interest during school as well as deferments. In addition, there are a variety of options for loan cancellation and discharge for FFELP/FDSLP that are not available on private loans.

The other side is that there is a huge distinction between subsidies to borrowers and subsidies to loan holders, guaranty agencies and other entities. While some may argue that these have been reduced significantly since October, those changes only apply to new loans. There are still hundreds of billions of dollars out there where there is a 'carrying cost' to the taxpayer of about $10 per $100 balance annually. There is a taxpayer cost even on loans where the borrower could not receive a subsidy ("unsubsidized Stafford"). Again, depending upon how the interest rates and the economy overall fare in the future, this may not be the case on new loans, but we still have all the old loans to support.

Remember, as well, that the

Remember, as well, that the first limitations on bankruptcy for federal student loans were pushed through by republicans in congress during the 1970's despite the fact that the bankruptcy rate at that point was less than 1%. So no, no one back then was intentionally declaring bankruptcy "willy nilly" either, and no one would now for those federal loans. The difference is that the government paid for most of those student's tuition by directly funding education back then, instead of allowing student fees to run rampant and private companies to commit usury.

Dennis Kucinich, a former democratic candidate for 2008, made as part of his platform free college education through phd for all; I wish Obama would pick that up.

Barack Obama Student Loans

I have read that Mr. & Mrs. Obama paid off their student loans. I searched all over the internet and cannot find anywhere how much they owed in student loans. I came from nothing, borrowed to go to law school (not Harvard) and owe a small fortune. I heard stories about Mr. Obama "working his way through law school" which cracks me up. Was he the CEO of a company to afford Harvard? I just want to know did they actually have to take out student loans or were they on scholarship? Let's be real. That is all I ask.

Any update from Obama on this yet?

I voted for Obama for ONE REASON ONLY! Student loan relief. This is the only issue that affects me directly. I have watched this stimulus plan carefully and thus far I can't find a word about this issue. I filed chapter 7 bankruptcy, not because I couldn't afford the credit card payment, but because I can't afford my student loans over a lifetime. I figured a getting rid of the credit cards is at least a help.

Obama will not get my vote again if he does not allow for people trying to improve their life to at least include student loans in a chapter 7 bankruptcy. In addition, since I already filed, I pray there will be a provision for people like me to reopen the case.

It is absolutely ridiculous that we are in a recession, there are no jobs and I am still required to pay $170,000. I did not kill anyone. I just borrowed money to try and become a more productive citizen.

ALL loans should be dischargable

Hey Federal Loan Backer the purpose of bankruptcy should be to give people a fresh start. Fresh start means exactly that. ALL loans, regardless of type should be included. If a bank can't handle the risk, that bank shouldn't be in business. Starting a business has risks, that includes banks. Except the bank can file bankruptcy and we can't. I found it ironic that the largest student loan vendor filed bankruptcy, but we cannot.

OBAMA WILL NOT GET MY VOTE, if he does not fix this travesty. I have no hope of ever owing a home, all because I chose to get an education, which in most civilized countries is paid for by the taxpayer (society).

I totally agree with you.

I totally agree with you. Almost all nations in the world use a part of tax payrs money to provide free education, college included, for their citizens. And here in this richest nation in the world most people can't get college education without being penalized. I'm not asking for the principle to be forgiven but the interest, which in most situation becomes to be greater than the actual money borrowed.