Certain loans mean long-term payments, headaches
By Michelle Singletary
WASHINGTON — Valisha Cooks assumed the college education she financed with debt — about half of it in expensive private student loans — would pay off handsomely.
Cooks, like so many others, assumed wrong.
"When I took out private student loans, I had no idea that I was condemning myself to a lifetime of ruined credit, harassment by collection agencies, and the hopelessness of endless debt," Cooks recently told a House subcommittee on commercial and administrative law that had convened to discuss legislation allowing borrowers to shed private student loans by filing for bankruptcy protection.
Many people are indeed better off financially with a college degree. It can increase their lifetime earning potential. But for too many others, they unwisely accumulate too much debt in pursuit of a degree, and then certain life circumstances, an illness, not enough pay or poor decisions make it difficult for them to handle the crushing loans.
Cooks' testimony is not unlike the many stories I hear, and her words of despair and defeat make a good case to allow these loans to be wiped away for down-and-out borrowers.
A single mother from Los Angeles, Cooks graduated with about $41,000 in federal loans and another $36,000 in private loans. The principal on the private loans had increased to $53,000 over three years, she told the subcommittee. Her total education loan payments were $1,150 a month, $750 for the private loans. Cooks testified that her loan payments were more than half of her net monthly pay.
Cooks did what so many others do when their debts gets to be too burdensome. She filed for bankruptcy. But it was a futile move.
"This was not a decision I made lightly," Cooks said. "Filing for bankruptcy was expensive and, most of all, humiliating. I was raised to work hard, pay my bills and be responsible."
About $10,000 in other debt was erased. But not her student loans.
"Now, even though I have a good job, I can't afford to pay all my bills in any one month," Cooks told the subcommittee. "I go to food banks to feed my son, and I will never be able to afford a house."
Like child support and tax debt, student loans are nearly impossible to eliminate in bankruptcy. You have to prove "undue hardship." And it's a high hurdle to jump.
It used to be that only federally backed student loans and loans where nearly all the funds came from a nonprofit institution couldn't be canceled by filing for bankruptcy, according the National Association of Student Financial Aid Administrators. In the case of the federal loans, this made sense. The government backs the loans and defaults are a direct hit to the federal budget, meaning we all pay for those who can't.
But in 2005, during a major overhaul of the bankruptcy code, private student loans were given an elevated status and thus couldn't be discharged. This didn't make sense. If we are going to have a fair bankruptcy system, private education loans should be treated the same as other private consumer debt. That's the risk lenders take, similar to those providing loans for cars, mortgages or other consumer purchases.
Lenders and opponents of this legislation argue that if people can erase their education debt, private loans for college will be tougher to qualify for and harder to get. There's a concern that people will get an education and immediately run to bankruptcy court to shed the obligation before they make big money.
I covered bankruptcy for years and seldom did I see bankruptcy petitioners gleefully sitting in the corridors of a courthouse eagerly waiting to shirk their financial responsibility. People usually seek bankruptcy protection as a last resort. Besides, there is a bankruptcy means test in place now to prevent people from scamming the system.
There have been some attempts to pull private loans out of this special status and allow borrowers to get rid of the debt in bankruptcy, but so far they have gone nowhere. Perhaps with Congress eyeing major legislative changes this session, the time is right to correct something that should have never been done in the first place.
Using an income-based repayment program available only for federally backed student loans, Cooks was able to get her federal loan payments to $124 a month. Her private lender was unwilling to greatly reduce her payments, Cooks testified. She sends what she can. Still her private loans are in default. Her wages may be garnished.
Without the shield from client bankruptcies, the lender doesn't have a huge incentive to negotiate a lower payment.
"I think part of the reason why my lender refuses to help me in any way is that they know I am stuck with the loan no matter what," Cooks said.
This time her assumption is right on the money.
Michelle Singletary writes for the Washington Post. Her e-mail address is sin firstname.lastname@example.org.