Bankruptcy

Education Loan Reform may ease Debt-Burdened Students

By Chris Kramer

Thursday’s news of the House of Representatives’ decision to back President Obama’s plan to end the Federal Family Education Loan Program (FFELP) has brought considerable tones to both sides of the political plate.

Democrats are in praise of the House bill, saying it represents a victory for students over the banks. Not surprisingly, most Republicans criticize the bill as a government takeover of an industry that has served students well.

But how will the passage of this bill and the resulting of the FFEL program dissolving affect those in the burdens and confines of bankruptcy?

The FFELP is the private sector student loan program that makes higher education affordable and accessible for millions of students and their families.

In today?s cumbersome financial climate more students than ever before are dependent on student loans to finance their education. According to SallieMae, roughly 78% of all student loans (were) provided under the FFELP, representing an estimated $64 billion in FY2009.

The Cost of Higher Education

What about those families who are struggling with bankruptcy and the financial burden of financing a college education? Will this place an even heavier burden on them?

There aren?t any benchmarks at this point to know, especially since this hasn?t been placed into a bill as it still sits within the Senate for approval. There is thought though that for those who are in the throes of bankruptcy this might offer a glimmer of hope to keep the two acts separate- bankruptcy and tuition.

Outlining this is the mere fact that by shifting towards a more universal financial aid lender, based in the federal government, then there will be less restrictive requirements for obtaining a loan.

If this were to happen then eligibility would be based more on the worthiness of the applicant as whole rather than of a credit score and history. In this it would also then put the responsibility of divvying up the offering to students by colleges a more balanced act.

Bankruptcy and Student Loans

Overall, there are two major points to consider if this bill passes the Senate. First being that filers for bankruptcy who are themselves applying for financial aid will not be able to discharge their student loans in the petition- unless they bring an action known as an Adversary Proceeding to the Bankruptcy Court. This would prove to the court that repaying the loans will create an undue hardship on themselves and their dependents.

Second and equally important is that one has nothing to do with the other; they are in fact mutually exclusive. The act of filing bankruptcy is one that is done in the spirit of reinvention, to give the petitioner a fresh start.

Adding to the mix the possibility that this person is either a college student needing financial aid or has a dependent who needs it has no bearing in the court process.

By taking the financial aid award out of the hands of our nation?s banking institutions and placing into the arms of our government- where many, many students already receive their loans ( via Perkins loans and others) - they are simply asserting a strategy to try and save close to $80 billion for our nation.

Full post as published by The Bankruptcy Blog on September 18, 2009 (boomark / email).