May 19, 2014

Cohen: More fairness for student loan hardship cases

WASHINGTON, DC (Press Release) – Congressman Steve Cohen (TN-09) joined several U.S. Senators and Representatives today in urging the Secretary of Education, Arne Duncan, to bring more fairness to struggling students by establishing clear standards of eligibility for “undue hardship” discharge of federal student loans in bankruptcy. In a letter sent by Congressman Cohen, U.S. Senators Dick Durbin (D-IL), Jack Reed (D-RI) and Elizabeth Warren (D-MA) with U.S. Representatives John Conyers (D-MI), Elijah Cummings (D-MD), and Hank Johnson (D-GA), the members said this type of guidance would benefit the most vulnerable student loan debtors by bringing consistency to the manner in which the Department of Education’s contractors handle undue hardship claims. Such guidance would further enable the Department of Education to focus student loan collection efforts on cases where there is a more realistic opportunity for loan recovery.

“Americans have accumulated $1.2 trillion in student loan debt, exceeding even the level of credit card debt in our nation. Seven in ten college seniors who graduated in 2012 had student loan debt, with an average of $29,400 per borrower. Because federal law treats student debt as nondischargeable in bankruptcy proceedings, borrowers can be burdened with this debt for a lifetime even if circumstances make it unlikely that the borrower will ever be able to repay,” the members wrote.

“Federal law does provide that bankruptcy discharge is available for student loans in cases of “undue hardship,” and while the courts have established a high legal standard for a debtor to show “undue hardship” there are some debtors who should be able to avail themselves of this option. However, the path to an undue hardship discharge is often blocked by Department contractors, such as the Educational Credit Management Corporation (ECMC), which have a practice of aggressively challenging debtors’ efforts to show undue hardship.”

“While we recognize the Department’s prerogative to fairly collect on student loan debts owed to it, we do not find it sensible or cost-effective for the Department or its contractors to engage in lengthy legal challenges and appeals against bankrupt student loan borrowers who have demonstrated a clear and legitimate inability to repay their loans.”

Congressman Cohen is also the lead sponsor of the Private Student Loan Bankruptcy Fairness Act of 2013 with Congressman Danny Davis (IL-07), which aims to restore fairness in student lending by treating privately issued student loans the same as other types of private debt in bankruptcy. In 2005, the law was unjustifiably changed to give private student loans the same privileged bankruptcy treatment as government loans, even though private student loans have vastly different terms and fewer consumer protections. The Congressman’s bill would amend the Bankruptcy Code to restore the dischargeability of debt from private loans made by for-profit lenders, which was available before 2005.

“Congress taking action on student loan debt is long overdue,” said Congressman Cohen when he introduced this legislation (H.R. 532). “People who seek higher education to better their futures should not be dissuaded from doing so by the threat of financial ruin. The bankruptcy system should work as a safety net that allows people to get the education they want with the assurance that, should their finances come under strain by layoffs, accidents, or other unforeseen life events, they will be protected. Our bill takes a modest but important step in achieving this goal.”

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