Wednesday, April 21, 2010

Democrats Introduce Bill to Make Private Student Loans Dischargeable in Bankruptcy!

Special thanks to"Lawsucks" at JD Underground for posting about this.  (It was posted earlier at the Education Matters blog, but I am not a regular reader of that blog, though perhaps I should be.)  If this bill passes, I think it would be profound, so I want to post about it here.

According to Dick Durbin's webpage, he and some other Democrats are working on a Bill that would make private student loans dischargeable in bankruptcy, just like other loans.  Combined with the Federal government's new Income Based Repayment (IBR) program, graduates who are unsuccessful in securing employment sufficient to allow them to pay off their loans might be able to free themselves from their shackles.  If you are in the process of racking up mountains of private student loan debt, you might want to consider borrowing a little extra ahead of time so that you can afford to hire a bankruptcy attorney.

If this Bill were to actually become law it could revolutionize higher education by restoring a negative feedback loop to the higher education-student loan industrial complex.  Imagine what would happen if the banks no longer wanted to risk $100,000 on law students who needed to borrow $150,000 for their JDs knowing that a very large percentage of those students will never find work in the legal profession.  (If tuition is $35,000/year, which is now very common, and the cost of living is $15,000/year, then students may need to borrow $150,000+, ignoring undergraduate loans.)  If students can borrow up to $56,000 in federal loans, they would need about $100,000 in private loans.  (My numbers for the federal limit may be out of date.)

One consideration for law graduates might be whether declaring bankruptcy would make them "unethical" for the purposes of state bar's character and fitness examinations.  So, declaring bankruptcy on your private student loans might also eliminate the possibility of your ever being able to practice law in the future.  However, if you graduate from law school and cannot find a job in the field but do find yourself buried under mountains of private student loan debt, bankruptcy might become a serious consideration.  In fact, in this economy you might find yourself without any viable alternatives.

Note that there is one potential loophole.  Depending on the exact wording of the Bill that gets signed into law (if it gets passed at all), this may not apply to private lenders that are 'nonprofits" or that are associated with "nonprofits", in which case most private loans might not be dischargeable at all and thus it may not have any real effect.

Potential effects of this legislation might be that:

(1.) A negative feedback loop could be restored to the higher education-student loan industrial complex.  This could also put pressure on universities and especially the law schools to reign in the spiraling costs of higher education.

(2.) Students might no longer be able to obtain private loans without having cosigners who have a significant amount of assets (parents).  This might be one way the banks will try to circumvent bankruptcy.  This might make it impossible for students from poor families and for students whose parents are not foolhardy enough to put themselves on the hook from being able to obtain private student loans.

(3.) As a result, the number of students who are able to pursue expensive graduate and professional degrees that have dubious economic value could be reduced.  Banks might actually have to consider whether or not attending second, third, and fourth tier law schools (or all law schools in general) at a cost of $150,000 is a good investment.

(4.) Interest rates on private student loans could increase, which means that successful graduates will have higher loan payments in order to subsidize less fortunate graduates.

(5.) Some law, business, and other graduate schools might be forced to close their doors as a result of having too few students.  Of course, they will scream to high heaven before that happens and the federal government will probably step in to provide federal student loans so that everyone can pursue higher education.

I am not an expert on legal ethics, so I am left wondering:

If you declare bankruptcy, are you essentially repudiating your JD and eliminating any possibility of ever being able to practice law? Would declaring bankruptcy magically make you "unethical" and "unfit" to practice law as far as character and fitness examination committees are concerned? 

What would happen if you declared bankruptcy after you had obtained your law licenses and never reported it to the Bar? (Are you even required a personal bankruptcy to the Bar?)

Are there any states where a bankruptcy after having earned a JD would not preclude you from passing a character and fitness examination?

I did a Google search and found few articles about it in the newspapers.  Here are a few blog posts I found after doing a Google search:

 

8 comments:

Anonymous said...

We've been there before. Just like mortgages and health care, whenever the Federal government subsidizes something, the costs go up. Student loans are no different. The Federal government is doing nobody any favors here.

http://schiffforsenate.com/?q=press-releases/schiff-responds-student-loan-bill

JD Underdog said...

I like #5, the fact that law schools could close its doors!

I don't think it's unethical to have a bankruptcy, but it's unethical to hide one. After you have received your law license, I don't believe there's a duty to report a bankruptcy, especially a personal one.

JD Underdog said...

By the way, I will link to this post on Twitter.

http://twitter.com/jd_underdog

C. Cryn Johannsen said...

Thanks for the mention. I've added you to my blog list, and I plan on reading you on a regular basis, too.

-Cryn Johannsen

Founder of Education Matters (http://alleducationmatters.blogspot.com/)

Frank the Underemployed Professional said...

Thank you, C. Cryn. Likewise, I will add your blog to my lists.

Anonymous said...

i'd like to see lenders have the right to claw back 50% to 75% of tuition paid to law schools that was borrowed by students who default on their loans. Giving the law schools some skin in the game would go a long way toward teaching some skills that are useful, keeping class size down, and keeping tuition low. Thoughts?

Anonymous said...

Bankruptcy is about a fresh start. Considering the legal job market, I would just walk away from my degree and the law if I could discharge these loans. I made a mistake and admit it. I can only wonder how may other would do the same!

C. Cryn Johannsen said...

Have you talked to a bankruptcy attorney before? My apologies for sounding condescending, but bankruptcy is hardly a fresh start. It's anything but. I realize you are in law school, but it's not a fresh start.

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