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Even after bankruptcy, trapped by student debt

Wednesday - 4/25/2012, 12:05pm  ET

By JUSTIN POPE
AP Education Writer

(AP) - The misfortunes that brought schoolteachers Devin and Sarah Stang and their four young children to bankruptcy _ and the loss of their house and a car in the process _ were their own unique story.

They bought the house at just the wrong time. There were heavy medical expenses when, at five months pregnant, she delivered stillborn twins. And their money woes go back further: When Sarah's college softball team pressured her to drop classes she wanted to take, she quit, lost her scholarship and had to make up the difference with loans. Devin, too, borrowed to get a master's degree. Then they struggled amid school layoffs near their Sandusky, Ohio, home.

Now, the Stangs just want a truly clean slate, financially. But even the ordeal of bankruptcy won't give it to them, and the reason is a common one: Much of their debt comes from private student loans.

Virtually any other kind of debt _ including medical bills, mortgage, credit cards and car loans, even gambling losses_ can be discharged in bankruptcy, allowing the "honest but unlucky" a chance to restore their footing through an arduous restructuring overseen by a court.

But under a 2005 law passed by Congress to protect lenders, private student loans fall under the same nearly-impossible-to-clear category as child support payments and criminal fines.

"It's a huge part of why the younger generations are here now," said the Stangs' bankruptcy lawyer, Matthew Barrett, whose busy office in Amherst, west of Cleveland, belies stories about the improving economy. He estimates half his clients have problems with student debt.

To advocates for student borrowers, the law is infuriating, counter-productive and _ if intended to ensure lenders would be willing to make loans to students_ demonstrably unnecessary. They see changing it as among the most effective, and least costly, ways to help those most seriously burdened by student debt, without giving a break to those for whom it's manageable.

Yet despite a voluble national conversation on student debt, the issue has gotten comparatively little attention.

At stops in three swing states this week, President Barack Obama is calling on Congress to head off a scheduled doubling in federal Stafford loan rates, from 3.4 percent to 6.8 percent. Changing that law could save more than 7 million new borrowers on average $1,000 a year, according to the White House. But this across-the-board benefit for current college students would do nothing for older borrowers already in trouble.

Acting without Congress, the Obama administration has implemented a series of protections for those pressed to pay back federal loans, such as income-based repayment and a public-service loan forgiveness program _ steps lauded by advocates for borrowers.

However, the president appears never to have directly addressed a proposal by Sen. Richard Durbin, D-Illinois, to overturn the 2005 law on private loans. Treasury Secretary Timothy Geithner recently told Durbin the dischargeability proposal had "some merit" and that the administration wanted to work with him to expand the protections it has implemented for federal student loans into the private market. Regardless, the bill has little chance of passing the divided Congress in an election year.

"There's a special circle of bankruptcy hell for these kinds of debts," said Rich Williams, higher education advocate with the group US PIRG, which lobbies on student loan issues. "It's not that students are asking for extra protections. We're asking for the same protections entitled to every other form of consumer debt."

The Federal Reserve Bank of New York estimates 37 million Americans have student loan debt, totaling $870 billion. The average balance is around $23,000 (though that partly reflects a relatively small number of very large balances; the median is $12,800). Only 39 percent are paying down balances. An estimated 5.4 million borrowers have at least one student loan account past due.

Roughly 85 percent of outstanding student loan debt is owed to the federal government. The remaining 15 percent that's counted as private student debt is owed to various non-federal lenders, ranging from banks to loan companies like Sallie Mae Corp. to non-profits and state-affiliated agencies (under the Durbin bill, loans from any government-funded entity still wouldn't be dischargeable, only those from truly private lenders).

Generally, it's these private loans that bring borrowers to the door of bankruptcy lawyers like Barrett. Private student loans often lack the protections of federal ones, and have rates that typically start higher and can shoot up. A recent survey of bankruptcy attorneys found 81 percent reporting more clients with student debt in recent years, and roughly half reporting a significant increase.

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