But not much.
Student loans are the bane of consumer debt. A series of changes to the bankruptcy code starting in the late 1970s and culminating in 1998 rendered it impossible for debtors to discharge their student loans short of a showing of “undue hardship,” which in practice meant that debtors had to be physically incapable of labor ever again in their lifetimes. The permanent “undue hardship” exception was extended to private loans in 2005. Common sense tells us that giving the creditors the full advantage of a loan is a bad idea. Common sense is right. Nondischargeability makes student debt a lifelong burden. Congress figured this out, and it changed student lending laws to allow debtors to apply for Income-Based Repayment (IBR) for the federal student loans. At first, this allowed debtors to cap their monthly payments at 15 percent of their discretionary income for 25 years. For graduates in 2014, the cap was reduced to 10 percent of discretionary income for 20 years.
Nevertheless, the economy is stalled, incomes have shrunk, and debt burdens have increased. So have student loan defaults, which has not gone unnoticed by a White House eager to appear proactive in contrast to the nonfunctional legislature. As part of its “We Can’t Wait” initiative, the President is proposing the following changes for student borrowers:
(1) Accelerate IBR reforms to January 2012 instead of 2014. This means that two years’ worth of college graduates will be able to benefit from cheaper IBR going forward. If you or a relative of yours is slated for a December graduation, you may wish to see if you can benefit by staying in school for another semester.
(2) Loan consolidation for those who have both federal guaranteed loans and federal Direct Loans. The government terminated the guaranteed loan program in 2010, and now all new federal loans come directly from the Department of Education. Many borrowers have both types of loans, and the government is offering to let them consolidate them into a Direct Loan, and it’ll throw in a 0.5 percent interest rate reduction to boot.
If these reforms sound underwhelming, it’s because they are. Point (1) will help 5.8 million debtors, and only 1.6 million people are eligible for consolidation in point (2). This contrasts with the 36 million Americans who have federal student loans of varying levels of repayment. The list of people who do not benefit is important:
· Those who borrowed from private banks to finance their educations are unaffected.
· Borrowers whose federal loans are in default do not benefit.
· Those who have either guaranteed loans or Direct Loans exclusively cannot consolidate.
Things are still bad for student debtors, but bankruptcy can help by reducing other types of debts, which frees income for other expenditures.
For more questions about student loans, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
