Congress may revive bankruptcy protection

Wes Minor

Congress may revisit whether students can receive bankruptcy protection on student loans after new legislation was proposed earlier this month.

Illinois Senator Richard Durbin proposed legislation that would reverse a 2005 decision that prevented students from declaring bankruptcy except under rare circumstances.

The 2005 decision followed legislation signed by President Clinton in 1998 that prevented students from filing for bankruptcy on federal loans.

The new legislation would only bring back bankruptcy protection on private loans. CSUN debt management counselor Gregorio Alcantar has the task of helping students avoid debt and runs workshops about the responsibilities of paying back loans.

Now even the private loan industry is wondering whether they went too far, Alcantar said. Companies such as Sallie Mae, one of the driving forces behind the 2005 legislation, are willing to consider making a change.

“It’s easier to get private loans,” Alcantar said. “Students usually have good credit? – at least in the beginning.”

Private loans also come with a higher interest rate, on average, and greater penalties for late or missing payments.

According to Alcantar, the penalties for defaulted loans include ineligibility for future loans and wages being garnished by the federal government.

Under the current law, only when “undue hardship” has occurred can students declare bankruptcy on loans. “What undue hardship means exactly can vary,” Alcantar said. A judge makes the final decision in each case.

The federal government gathers student loan statistics from every university in the United States. According to the U.S. Department of Education, 3.3 percent of CSUN student loans defaulted in 2004, the most recent year of available statistics. This number is low compared to the national average of 5.5 percent.

Senator Durbin plans to propose the legislation as an amendment to the Higher Education Act when it comes up for reauthorization later this year.