Wednesday, May 24, 2017

Bankruptcy Relief Bill H.R. 2366, "Discharge Student Loans in Bankruptcy Act of 2017": Does it have a prayer of becoming law?

Earlier this month, Congressmen John Delaney (D-Maryland) and John Katko (R-New York) filed a bill in the House of Representatives that would eliminate the "undue hardship" rule contained in 11 U.S.C sec. 523(a)(8). H.R. 2366, if adopted into law, would put student loans on par with credit card debt and other consumer debt, making student loans more easily dischargeable in bankruptcy. As Congressman Delaney put it, "It doesn’t make sense for students with heavy debt burdens to be worse off than someone with credit card debt or mortgage debt."

How many student borrowers would qualify for bankruptcy relief if the Delaney-Katko bill becomes law?

This could be a very big deal. If "the undue hardship" rule is struck from the Bankruptcy Code, millions of student borrowers could seek relief from their student loans.  How many millions?

We know from looking at a 2015 Brookings Institution report that nearly half the people from a recent cohort of borrowers who took out student loans to attend for-profit colleges defaulted within five years.  Clearly, a great many of these people would qualify for bankruptcy relief.

And the Federal Reserve Bank of New York reported recently that a third of student borrowers who owed $5,000 or less defaulted in five years, while 18 percent of the people who borrowed $100,000 or more defaulted.  Assuming these defaulters are insolvent, nearly all them would be eligible for bankruptcy relief if the Delaney-Katko bill becomes law.

Who will opposed this legislation?

Obviously, most of the 44 million people weighed down by student-loan debt will support this bill. Who will opposed it?

The bill would give bankruptcy relief for people who took out both federal student loans and private student loans. Private lenders who are heavily invested in the student-loan business--Wells Fargo, Sallie Mae, etc.--will oppose this bill fiercely; and their lobbyists are probably already at work.

The nation's colleges and universities will also oppose this bill, but they won't be vocal about it. It is hard for universities to insist on getting billions of dollars in federal student-aid money every year while publicly opposing relief to people who went broke because they borrowed too much money to attend college.

But make no mistake: the colleges and universities understand that the Delaney-Katko bill, if it becomes law, will unleash a floodgate of bankruptcy filings; and this deluge will force Congress to clean up the student-loan scandal.  The colleges want the party to last a little while longer; and this legislation will help bring the party to an end if it ever gets enacted.

In the past, beneficiaries of the student-loan boondoggle  have used lobbyists and campaign contributions very effectively  to protect their interests, while student debtors suffered in silence. But the tables may be about to turn. More than 40 million people are burdened by student-loan debt, and these people vote.

Will the Delaney-Katko bill become law?

What are the chances that the Delaney-Katko bill will become law? It is hard to say. A bill was introduced several years ago to stop the government from garnishing Social Security checks of student-loan defaulters and that bill never made it out of committee.

So it is possible, that this bill will go nowhere.  Nevertheless, I am impressed by the fact that the Delaney-Katko bill has been framed as a bipartisan initiative. So far, it has at least ten co-sponsors:

Debbie Dingell (D-Michigan)

Paul Tonko (D-New York)
Kyrsten Lea Sinema (D-Arizona)
Zoe Lofgren (D-California)
*John Delaney (D-Maryland)
*John Katko (R-New York)
Edwin Perlmutter (D-Colorado)
Alan Lowenthal (D-California)
Catherine Castor (D-Florida)
Marc Veasy (D-Texas)

Let's all write our elected representatives and express our support for the Delaney-Katko bill.

The Delaney-Katko bill, if it becomes law, will afford relief to millions of people who have been pushed out of the economy by student loans. Let's watch this bill closely and give it all the support we can.

Every student-loan debtor should write his or her Senator and Congressperson to express support for the Delaney-Katko bill. They should stress that this proposed legislation is not radical. In fact, scholars and policy makers have advocated for years that distressed student-loan debtors should have easier access to the bankruptcy courts.

And let's take a moment to salute the political courage of Representative John Katko of New York--the first Republican to support this legislation.


Rep. John Katko (R-New York): Profile in Courage


References

Representative John Delaney press releaseDelaney and Katko File Legislation to Help Americans Struggling with Student Loan Debt, May 5, 2017.


Representative John Katko press release. Reps. Katko and Delaney File Legislation to Help Americans Struggling with Student Loan Debt. May 8, 2017.





4 comments:

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