Archive for Friday, April 30, 2010

Private student loans create ‘endless debt’

April 30, 2010


— Valisha Cooks assumed the college education she financed with debt — about half of it in expensive private student loans — would pay off handsomely.

Cooks, like so many others, assumed wrong.

“When I took out private student loans, I had no idea that I was condemning myself to a lifetime of ruined credit, harassment by collection agencies, and the hopelessness of endless debt,” Cooks recently told a House subcommittee on commercial and administrative law that had convened to discuss legislation allowing borrowers to shed private student loans by filing for bankruptcy protection.

Too high a price

Many people are indeed better off financially with a college degree. It can increase their lifetime earning potential. But for too many others, they unwisely accumulate too much debt in pursuit of a degree, and then certain life circumstances, an illness, not enough pay or poor decisions make it difficult for them to handle the crushing loans.

Cooks’ testimony is not unlike the many stories I hear, and her words of despair and defeat make a good case to allow these loans to be wiped away for down-and-out borrowers.

A single mother from Los Angeles, Cooks graduated with about $41,000 in federal loans and another $36,000 in private loans. The principal on the private loans had increased to $53,000 over three years, she told the subcommittee. Her total education loan payments were $1,150 a month, $750 for the private loans. Cooks testified that her loan payments were more than half of her net monthly pay.

Cooks did what so many others do when their debts get to be too burdensome. She filed for bankruptcy. But it was a futile move.

“This was not a decision I made lightly,” Cooks said. “Filing for bankruptcy was expensive and, most of all, humiliating. I was raised to work hard, pay my bills and be responsible.”

About $10,000 in other debt was erased. But not her student loans.

“Now, even though I have a good job, I can’t afford to pay all my bills in any one month,” Cooks told the subcommittee. “I go to food banks to feed my son, and I will never be able to afford a house.”

Like child support and tax debt, student loans are nearly impossible to eliminate in bankruptcy. You have to prove “undue hardship.” And it’s a high hurdle to jump.

It used to be that only federally backed student loans and loans where nearly all the funds came from a nonprofit institution couldn’t be canceled by filing for bankruptcy, according the National Association of Student Financial Aid Administrators. In the case of the federal loans, this made sense. The government backs the loans and defaults are a direct hit to the federal budget, meaning we all pay for those who can’t.

Elevated status

But in 2005, during a major overhaul of the bankruptcy code, private student loans were given an elevated status and thus couldn’t be discharged. This didn’t make sense. If we are going to have a fair bankruptcy system, private education loans should be treated the same as other private consumer debt. That’s the risk lenders take, similar to those providing loans for cars, mortgages or other consumer purchases.

Lenders and opponents of this legislation argue that if people can erase their education debt, private loans for college will be tougher to qualify for and harder to get. There’s a concern that people will get an education and immediately run to bankruptcy court to shed the obligation before they make big money.

I covered bankruptcy for years and seldom did I see bankruptcy petitioners gleefully sitting in the corridors of a courthouse eagerly waiting to shirk their financial responsibility. People usually seek bankruptcy protection as a last resort. Besides, there is a bankruptcy means test in place now to prevent people from scamming the system.

There have been some attempts to pull private loans out of this special status and allow borrowers to get rid of the debt in bankruptcy, but so far they have gone nowhere. Perhaps with Congress eyeing major legislative changes this session, the time is right to correct something that should have never been done in the first place.

Using an income-based repayment program available only for federally backed student loans, Cooks was able to get her federal loan payments to $124 a month. Her private lender was unwilling to greatly reduce her payments, Cooks testified. She sends what she can. Still her private loans are in default. Her wages may be garnisheed.

Without the shield from client bankruptcies, the lender doesn’t have a huge incentive to negotiate a lower payment.

“I think part of the reason why my lender refuses to help me in any way is that they know I am stuck with the loan no matter what,” Cooks said.

This time Cooks’ assumption is right on the money.


Bruce Liddel 7 years, 11 months ago

I wonder why people who want to fly airliners are willing to incur $250,000 in education and experience costs in order to make $18,000 or even less, their first year as an airline pilot. The days of pilots making six-figure incomes, even on the biggest planes towards the end of careers, are long gone. This year (and for the foreseeable future) the Air Force will train more pilots to fly drones than to fly manned airplanes, so forget thinking of our military as providing enough qualified pilots for our airlines.

Now congress wants to quadruple the required flight experience so that career-ambitious pilots have to spend closer to One Million Dollars before they can fly as even a copilot on airliners, probably for the same absurdly low pay that Captain Chesley "Sully" Sullenberger III has been warning us about.

Let this sort of nonsense go on for 10 or 20 years, and watch people boo hoo about how they can't get a commercial flight to anywhere they want to go, and can't afford to fly wherever they don't want to go, and watch airlines continue to go out of business or merge, because the economics of commercial flight have been destroyed by our well-intentioned not-so-all-knowing overprotective friend, Uncle Sam.

just_another_bozo_on_this_bus 7 years, 11 months ago

Air travel on the scale it now exists is doomed, anyway, simply because the fuel to power the planes will become increasingly and prohibitively expensive. And taxpayers will then tire of providing all the massive subsidies necessary to support air-travel infrastructure, which will mean that most air travel will be replaced by high-speed rail.

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