On September 23, the U.S. House of Representatives Judiciary Committee, Subcommittee on Commerical and Administrative Law held a hearing on discharging educational debt in bankruptcy.
Brett Weiss delivered testimony on behalf of the National Association of Consumer Bankruptcy Attorneys (NACBA) and NCLC’s Student Loan Borrower Assistance Project. Chairman of the House Committee on Education and Labor George Miller issued a statement in support of the need to change bankruptcy laws to protect student borrowers. Representative Danny Davis also testified at the hearing. Other testimony is available on the hearing web site.
We cited a report from the 1970’s in our testimony because 1) This is the report Congress commissioned during the initial debate on this issue, 2) This report did not support the conclusion that students were more likely to discharge debts in bankruptcy, and 3) It is the only comprehensive report on this issue that we know of. There simply isn’t any evidence to support the claim that student borrowers are more likely to declare bankrutpcy than other consumers.
The hearing focused on problems with the current undue hardship system. The current system is broken in many ways, as we detail in our testimony. Professor Rafael Pardo also testified about problems with the undue hardship test.
The undue hardship system is broken, but we urge Congress to do more than simply tweak the hardship test. Low-income borrowers have few, if any, resources to pay for legal assistance to prove to judges that they suffer from undue hardship. This would still be true even with a more defined standard. Although it would be helpful to have a clear definition under the current system, the better solution is to restore dischargeability rights for students.
Policymakers should also beware of arguments that changes in bankruptcy policy would constrict the availability of private student loans or make them more expensive. The reality is that before the bubble burst, lenders spent years making all kinds of loans regardless of risk. They lent money like candy in cases where the debts were ultimately dischargeble in bankrutpcy (e.g. credit cards) and in cases where debts were harder to discharge in bankruptcy (e.g. mortgages and student loans). The result was a largely unregulated predatory student lending market. (Lauren Asher, President of the Institute for College Access and Success, testified at the hearing about key problems with private student loans).
A more restrictive bankruptcy policy probably made the student loan securitization packages more attractive to many investors, but investors were buying up just about anything during the bubble years. A return to the days of risky lending is not good for borrowers, creditors, or the economy.
We will not rein in abusive credit practices by denying rights to financially distressed borrowers. Rather, we need regulation to ensure that creditors lend more responsibly.
