Student Loans, Bankruptcy and Important Developments

Student Loan and Bankruptcy: Important Developments

 Student loan is a burning topic as it is greatly affecting young people as rising student loans had made their economic life miserable. They have starting jobs, where because of high student loan payments, they cannot fully enjoy their life, move around, buy property, or even can marry because of mounting debts. Also, it has not only affected them but in many cases t heir parents as well who had signed their loan documents. The federal government had provided relief to everyone, including the homeowners, auto owners (yes, the clinkers relief) all of them have gotten major government attention, legislative and administrative interference and financial help. The area of student loans is probably one big area which is desperate to have both legislative and administrative attention. No need to prove how our large student community has suffered because of student loans. We have still have fresh memories of the Wall Street demonstration and sit in of students only a year ago. We know that student loans cannot be discharged through bankruptcy and the small exception requires a very stringent test. However, the House passed legislation to head off a doubling of student loan interest rates on July 1, instead tying rates to prevailing market trends and ending federal subsidies.

At stake is a subsidized loan rate of 3.4 percent for more than 7.4 million students with federal Stafford loans, which will jump to 6.8 percent if Congress fails to act.

  • The House bill would allow student lending rates to reset each year, based on the interest rate of a 10-year Treasury note, plus 2.5 percentage points for Stafford loans.
  • Under the legislation, Stafford loans would be capped at 8.5 percent, while loans for parents and graduate students would have a 10.5 percent cap.
  • Mr. Obama has a different proposal which would set student lending rates each year based on Treasury’s borrowing costs, but those rates would be fixed for the life of the loan, not reset each year.

While these proposals are an icing on the cake, they may not do any dent in the student loan difficulties. We suggest that a onetime measure on the same patterns as housing bill which handled the underwater homes and required banks to modify the home loans. Of course, there were severe draw back in that package. We like to propose a one time Student Loan Amnesty, or Student Loan Relief Act as follows:

-At least half of the principal balance should be forgiven.

-All student loans older than 10 years should be cut down to one third of their original size.

-An interest rate of 3 percent should only be charged.

-All late fees, delinquent fee, collection charges should be waived.

More meaningful changes be made in the Bankruptcy Code to provide one time big meaningful relief in both Chapter 7 and Chapter 13.

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