Discovering draconian debt

Elizabeth Warren, who has the role of setting up the Bureau of Consumer Financial Protection by President Obama,  poses this question: “Why should students who are trying to finance an education be treated more harshly than someone who negligently ran over a child or someone who racked up tens of thousands of dollars gambling?”

It’s a darn good question.

Ever since the Bankruptcy Reform Act of 1978, consumer protections have been gradually but grossly stripped from student loans.

First, discharges were not allowed until five years had passed after the first payment, but now student loans are absolutely non-dischargeable unless “undue hardship” upon the debtor or dependents are proven, a rule that is inconsistently applied.
 
Originally, this non-discharge protection only included student loans backed by government entities, but in 2005, legislation egregiously expanded it to private student loan lenders.

Meanwhile, mortgages, credit-card balances and gambling debts are all easily excused without the debtor having to prove undue hardship.

As for students, they do not have the protections of Truth in Lending Act measures, statute of limitations, certain exemptions of the Fair Debt Collection Practices Act and other key safeguards awarded to nearly all other loans.

Additionally, student loans are subject to the most brutal debt collection policies: wage garnishment is allowed for debts on student loans without a court order, as is garnishment of social security and disability benefits.

As college costs rise along with the debt students accumulate, these draconian measures take their toll. But what about overhaul of the student loan program that was slipped into healthcare reform not too long ago?

President Obama hailed the reform as “one of the most significant investments in higher education since the GI Bill.”

The reform cuts out many of the middlemen (mainly Sallie Mae) who lined their pockets repeatedly and gratuitously throughout the debt collection process; now students might borrow directly from the government.

However, this just turns the vastly profitable student loan market back to the government while saving taxpayers a truckload. While some of these subsequent savings will go toward the Pell Grant program and some interest rates will be lowered, the reforms actually accomplish little on behalf of students themselves.

These are positive changes for the country (before, Sallie Mae made a killing on student loans at no risk to itself) but students are still left defenseless.

With the Department of Education receiving 20 percent returns from interest and fees on defaulted student loans, the government has no incentive to protect students’ rights. Instead, students are treated as a cash cow, and criminally so.

And yet, reform might be on the horizon — only last week a House subcommittee passed legislation H.R. 5043, which would reinstate bankruptcy protections to private student loans.

Although it has overcome its first obstacle, the bill is still a long way from becoming law. Republican opposition is strong as they fret over the market for private loans and worry, rather needlessly in this case, over abuse of the bankruptcy system — as if uncapped interest rates are in no way abusive to students.

I urge you to call or write your representatives and ask them to support H.R. 5043, the Private Student Loan Bankruptcy Fairness Act. One day, you may be glad that you did.
    

E-mail: celgrund@indiana.edu