Magazine article American Banker

A Simple Solution for Overburdened Student Loan Borrowers

Magazine article American Banker

A Simple Solution for Overburdened Student Loan Borrowers

Article excerpt

Byline: John McMickle

Congress has been making it harder for borrowers to get out of their student loan obligations since the late 1990s. But in the face of concerns about student loan debt's impact on individuals and the broader economy, lawmakers are facing growing pressure to ease the burden of repayment.

Policymakers have good reason to be worried about student debt. The total debt outstanding for students in the United States exceeds $1 trillion, and this debt loan may be inhibiting growth in the housing market.

Some leading proposals in Congress would allow borrowers to erase private student debt while preventing the discharge of government student loans. But the recent history of bankruptcy law suggests there's a better way to provide relief to student borrowers while minimizing concerns about moral hazard.

Current bankruptcy law permits the elimination of any student loan if repayment would be an undue hardship on the debtor and the debtor's dependents." In a court decision from 1987 referred to as the Brunner case, a federal appeals court ruled that proving "undue hardship" requires borrowers to meet two requirements. First, borrowers must be able to show that they cannot maintain a minimal standard of living if forced to repay student loans. Second, they must show that they have made a good-faith effort to improve their financial status but that financial hardship is likely to continue for an extended period.

The policy question for Congress and the public is whether to allow borrowers to discharge student debt even when repayment would not be an undue hardship. In considering this question, it's important to note that prior to 1998, borrowers could eliminate all of their student loans if the loans had been in repayment for at least seven years -- without regard to the undue hardship standard. …

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