[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
AN UNDUE HARDSHIP? DISCHARGING EDUCATIONAL DEBT IN BANKRUPTCY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 23, 2009
__________
Serial No. 111-58
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
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00-000 WASHINGTON : 2009
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COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas DANIEL E. LUNGREN, California
MAXINE WATERS, California DARRELL E. ISSA, California
WILLIAM D. DELAHUNT, Massachusetts J. RANDY FORBES, Virginia
ROBERT WEXLER, Florida STEVE KING, Iowa
STEVE COHEN, Tennessee TRENT FRANKS, Arizona
HENRY C. ``HANK'' JOHNSON, Jr., LOUIE GOHMERT, Texas
Georgia JIM JORDAN, Ohio
PEDRO PIERLUISI, Puerto Rico TED POE, Texas
MIKE QUIGLEY, Illinois JASON CHAFFETZ, Utah
LUIS V. GUTIERREZ, Illinois TOM ROONEY, Florida
BRAD SHERMAN, California GREGG HARPER, Mississippi
TAMMY BALDWIN, Wisconsin
CHARLES A. GONZALEZ, Texas
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California
DEBBIE WASSERMAN SCHULTZ, Florida
DANIEL MAFFEI, New York
Perry Apelbaum, Majority Staff Director and Chief Counsel
Sean McLaughlin, Minority Chief of Staff and General Counsel
------
Subcommittee on Commercial and Administrative Law
STEVE COHEN, Tennessee, Chairman
WILLIAM D. DELAHUNT, Massachusetts TRENT FRANKS, Arizona
MELVIN L. WATT, North Carolina JIM JORDAN, Ohio
BRAD SHERMAN, California HOWARD COBLE, North Carolina
DANIEL MAFFEI, New York DARRELL E. ISSA, California
ZOE LOFGREN, California J. RANDY FORBES, Virginia
HENRY C. ``HANK'' JOHNSON, Jr., STEVE KING, Iowa
Georgia
ROBERT C. ``BOBBY'' SCOTT, Virginia
JOHN CONYERS, Jr., Michigan
Michone Johnson, Chief Counsel
Daniel Flores, Minority Counsel
C O N T E N T S
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SEPTEMBER 23, 2009
Page
OPENING STATEMENTS
The Honorable Steve Cohen, a Representative in Congress from the
State of Tennessee, and Chairman, Subcommittee on Commercial
and Administrative Law......................................... 1
The Honorable Trent Franks, a Representative in Congress from the
State of Arizona, and Ranking Member, Subcommittee on
Commercial and Administrative Law.............................. 3
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, Chairman, Committee on the
Judiciary, and Member, Subcommittee on Commercial and
Administrative Law............................................. 4
WITNESSES
The Honorable Danny K. Davis, a Representative in Congress from
the State of Illinois
Oral Testimony................................................. 8
Prepared Statement............................................. 10
Ms. Lauren Asher, The Institute for College Access and Success
Oral Testimony................................................. 14
Prepared Statement............................................. 16
Mr. Rafael I. Pardo, Seattle University School of Law
Oral Testimony................................................. 27
Prepared Statement............................................. 30
Mr. J. Douglas Cuthbertson, Miles & Stockbridge, P.C.
Oral Testimony................................................. 45
Prepared Statement............................................. 47
Mr. Brett Weiss, Joseph, Greenwald & Laake, P.A.
Oral Testimony................................................. 55
Prepared Statement............................................. 57
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan,
Chairman, Committee on the Judiciary, and Member, Subcommittee
on Commercial and Administrative Law........................... 5
Prepared Statement of the Honorable Henry C. ``Hank'' Johnson,
Jr., a Representative in Congress from the State of Georgia,
and Member, Subcommittee on Commercial and Administrative Law.. 7
APPENDIX
Material Submitted for the Hearing Record
Material submitted by the Honorable Trent Franks, a
Representative in Congress from the State of Arizona, Member,
Committee on the Judiciary, and Ranking Member, Subcommittee on
Commercial and Administrative Law.............................. 79
Answers to Post-Hearing Questions from Lauren Asher, The
Institute for College Access and Success....................... 81
Answers to Post-Hearing Questions from Rafael I. Pardo, Seattle
University School of Law....................................... 85
Answers to Post-Hearing Questions from Brett Weiss, Joseph,
Greenwald & Laake, P.A......................................... 90
Prepared Statement of the American Association of Collegiate
Registrars and Admissions Officers (AACRAO), the American
Association of State Colleges and Universities (AASCU), and the
National Association for College Admission Counseling (NACAC).. 91
Letter to the Honorable Steve Cohen, a Representative in Congress
from the State of Tennessee, and Chairman, Subcommittee on
Commercial and Administrative Law, from Richard Williams,
USPIRG Higher Education Associate.............................. 95
Letter to the Honorable Steve Cohen, a Representative in Congress
from the State of Tennessee, and Chairman, Subcommittee on
Commercial and Administrative Law, from a coalition of groups
in support of the issue........................................ 97
Submission from the Institute for College Access and Success..... 98
AN UNDUE HARDSHIP? DISCHARGING EDUCATIONAL DEBT IN BANKRUPTCY
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WEDNESDAY, SEPTEMBER 23, 2009
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 1:10 p.m., in
room 2141, Rayburn House Office Building, the Honorable Steve
Cohen (Chairman of the Subcommittee) presiding.
Present: Representatives Cohen, Conyers, Watt, Franks,
Coble, and King.
Staff present: (Majority) James Park, Counsel; Andres
Jimenez, Professional Staff Member; (Minority) Zach Somers,
Counsel; and Jennifer Lackey, Staff Assistant.
Mr. Cohen. This hearing of the Committee on the Judiciary,
Subcommittee on Commercial and Administrative Law will now come
to order. Without objection, the Chair will be authorized to
declare a recess of this hearing. I will now recognize myself
for a short statement.
Today we examine the conditional dischargeability of
student loan debt in bankruptcy with a particular emphasis on
the discharge of private, non-federally guaranteed or
subsidized student loans. Congress has not held a hearing on
the student loan dischargeability provision of the Bankruptcy
Code since its first enactment in 1976, which was an amendment
to the Higher Education Act, nor have they considered the 2005
extension of this provision to private student loans in
particular.
In light of the rising cost of obtaining higher education,
and particularly in light of the increase in the relativity--
relatively unregulated private student loan market, such an
examination is long overdue. We both see these higher costs of
higher education and people having more difficulty securing
second jobs and whatever necessary to help them through
college, and then a difficulty getting jobs once they are out
to use their education.
Unlike other kinds of unsecured debt, the Bankruptcy Code
conditions the discharge of student loan debt on a debtor
showing that he or she will suffer an undue hardship if forced
to repay the loan. Congress' rationale, if there is such a
thing, for giving student loan creditors favorable treatment in
bankruptcy was to protect the viability of the Federal student
loan program and more generally, public monies.
Four years ago, Congress went beyond Federal money
protection and extended this type of favorable, unusual
treatment to a private student loan, without any rationale
expressed or claimed, no empirical evidence supporting such an
extension. It is understandable why we want to have some level
of support for our own loan program, but for those less
favorably offered private, there was no particular reason
except that BAPCPA, in 2005, kind of took in a--the entire sink
of what people desired to have in the law, and that is what
happened.
Access to education has been one of the defining issues of
my legislative career, which has lasted now through 3 decades.
As a Tennessee senator I fought 18 years to establish the
Tennessee Lottery, which provides Hope Scholarships, as in
Georgia, to young people who meet certain criteria and gives
them scholarships--over $1.5 billion thus far since the program
was initiated in 2004.
These scholarships have done a lot for students in
Tennessee, but they need other monies as well to make it
through college, and the scholarships we have in Tennessee--the
Hope Scholarships--help folks make it who otherwise might not
be able to afford it, and there is a merit portion and a need-
based portion.
Given this history of championing access to higher
education of students of modest means, I view with concern the
great increase in the number of private student loans issued
over the last decade. Ostensibly, these types of loans, which
are not Federal guaranteed or subsidized, could provide greater
access to a college education for those who may not qualify for
Federal loans or who would otherwise not be able to afford
college education. However, recent studies suggest that the
access that private student loans could provide may bring costs
that outweigh their benefits.
Private student loan borrowers often find themselves
trapped under the weight of tens of thousands of dollars in
expensive, high-interest hefty student loan debt with no
guaranteed opportunity for income-based repayment, deferment,
or forbearance. It was these types of loans that caused me to
condition Tennessee's lottery program on repaying college debt,
for I have seen too many people in my private practice who had
high debt and were--and had one foot in bankruptcy while
struggling to get their debt paid off, which would never have
come to an end.
Unlike Federal student loans, private loans lack consumer
protections and any hope of having a job later, leaving
financially distressed borrowers with little option but to seek
bankruptcy relief. Some commentators have suggested that such
bankruptcy relief may be too difficult to obtain, or at least
that obtaining discharge may be haphazard. Professor Rafael
Pardo, one of our witnesses today, has conducted empirical
studies suggesting that similarly situated student loan debtors
may receive different outcomes with respect to their attempts
to discharge student loan debt.
Non-legal factors, such as the experience level of the
debtor's attorney or the identity of the judge often determine
the outcome of the discharge request, raising questions about
whether the undue hardship standard is really a workable one.
Kind of reminds me of Barry Scheck yesterday.
I thank our witnesses for being here today, and I look
forward to their testimony and maybe seeing why these student
loans are put in a special category otherwise reserved for
things like fraud, child support, alimony, and primary home
mortgages.
I now recognize my colleague, Mr. Franks, the distinguished
Ranking Member of the Subcommittee, who has offered to forego
this hearing but his offer was not accepted----
Mr. Franks. Well, thank you, Mr. Chairman. Mr. Chairman,
last week on a largely party-line vote, the House in full
session passed H.R. 3221, the Student Aid and Fiscal
Responsibility Act. The fiscal responsibility confuses me, but
be that as it may.
This legislation is a dramatic shift away from private
student-lent board consolidation of Federal power over higher
education financing. In fact, today we--in fact, according to
the Time magazine, the Administration's proposal to restructure
the student loan industry is, according to them, much closer to
an actual government takeover than its health care reform plan.
The passage of H.R. 3221 in the House makes today's
hearing, in my judgment, especially troubling. If H.R. 3221
isn't the death knell of private student lending, ending the
favorable treatment that private student loans receive under
the Bankruptcy Code certainly could be.
Since 1976 Congress has gradually increased the protections
that Federal nonprofit and for-profit student lenders receive
under the Bankruptcy Code. Some would like to see these
bankruptcy protections erased, especially with regard to
privately-issued student loans.
However, Mr. Chairman, privately-issued student loans
increase access to education by providing a source of funding
to those that need to borrow more than the Federal student loan
limits allow. Additionally, private-issued student loans allow
lenders to tap into billions of dollars in private capital. Now
if private capital, maybe we should toss in here just the
definition: Private capital is that capital that the Federal
Government doesn't have to borrow from abroad to fund our
Nation's educational system.
Critics of the special bankruptcy protection student loans
receive--that student loans receive point to the high costs of
higher education that lead many students to incur substantial
debt as they try to put themselves through school, and I
understand that, but college affordability and the cost of
student loans are issues Congress should indeed try to address,
but allowing student loans to be unconditionally dischargeable
in bankruptcy is not a solution to those problems.
If we make student loans unconditionally dischargeable we
will encourage abuse, increase the interest rates students pay
on their loans, and dry up the flow of capital into the student
lending market. This will either decrease access to higher
education or create a vacuum the Federal Government will have
to fill again at taxpayer expense.
Now, I suspect, of course, that the push to make privately-
issued student loans unconditionally dischargeable is part of a
broader effort to replace all privately-issued student loans
with government loans. But Mr. Chairman, just as we do not need
a single-payer health care system, we do not need a single-
lender higher education system.
There is no reason to crowd private lenders out of the
student loan market, either directly through legislation like
H.R. 3221 or indirectly through changing the bankruptcy rules
that apply to student loans. Yes, Mr. Chairman, the government
should regulate private student loans to eliminate any abusive
lender practices, but the real culprit here is the rapidly
rising cost of higher education, which has been escalating way
beyond the general rate of inflation.
Making private sector loans dischargeable in bankruptcy
will do nothing to solve college affordability problems. And
ultimately, Mr. Chairman, I would like to say sometimes that
your future generations are watching. Because I truly believe
that in the long run, when we as government come in and try to
think that somehow our power can repeal the laws of mathematics
and make private lenders just suddenly do the same thing that
they have always been doing, even though there is greater risk
to them, it just doesn't happen that way.
I know it is a good theory, but someone said that there is
nothing more tragic in this world than a beautiful theory that
is totally destroyed by an unruly set of facts. And
unfortunately, the effect of both this legislation that we have
discussed and this bankruptcy concept that we are discussing
will be to drive capital away from the ability to help finance
education, and I believe that that will hurt students in the
long run.
And unfortunately, Congress doesn't have the power to do
anything to repeal that mathematical equation except to inject
taxpayer dollars into the equation, and sooner or later there
will be a day of reckoning. I submit that it is probably
already here and we don't know it.
With that, I look forward to the witness' testimony and
yield back the balance of my time. Thank you, Mr. Chairman.
Mr. Cohen. Thank you.
I thank the gentleman for his statement and for looking
forward to the witness' testimony. I now recognize Mr. Conyers,
the distinguished Member of the Subcommittee, for his opening
statement and the Chairman of the Committee on the Judiciary.
Do you have an opening statement or would you like to
waive?
Mr. Conyers. Well, I will partially waive it, Mr. Chairman.
Just to greet Danny Davis and to commend him for the great
work that he has done in the course of his career. I mean, it
is not anybody that can get President Bush to sign a bill we
thought he didn't like, and there we were in the White House up
there with President George W. Bush just like it was the normal
way we do business around here.
So I commend him for his tenacity. I knew Danny Davis when
he wasn't a congressman, and I think that this idea is very
important.
And the reason I only need a minute is that I have started
thinking about what is so different about discharging student
loans that is different from discharging everything else that
is dischargeable? I mean, this isn't a gambling debt; this
isn't something that is against the common good or against the
general welfare.
Credit cards are dischargeable. I don't hear anybody
ranting about that. You rant about it too. You rant, ``Okay,
well that is good.'' Consistency is the hot button of great
minds.
And what about mortgages being discharged in bankruptcy?
Your yacht is dischargeable in bankruptcy. Your vacation resort
place is dischargeable in bankruptcy. Your second or third home
are all dischargeable in bankruptcy.
Then you get to, what are these people doing trying to get
an education and run into trouble and they go to the bankruptcy
judge? Well, no. The door is closed. After all, in 1976 we
said, ``Enough of this government-funded guaranteed student
loans being made dischargeable. We are changing that.''
Well, my colleagues weren't even here in 1976, so I can't
even blame them for it. Matter of fact, they could blame me for
it. I was here.
So I think Congressman Davis asking us to take another look
at this is a good idea, and I will put my statement in the
record.
[The prepared statement of Mr. Conyers follows:]
Prepared Statement of the Honorable John Conyers, Jr., a Representative
in Congress from the State of Michigan, Chairman, Committee on the
Judiciary, and Member, Subcommittee on Commercial and Administrative
Law
Obtaining higher education is the key to economic security and a
better future. For our youth, it may present the only way out of a life
of poverty.
And for many middle class Americans facing unemployment, returning
to school to be retrained for a new profession may be their best way to
getting back into gainful employment.
Unfortunately, changes made to our bankruptcy laws have made
getting a higher education more difficult, in ways that may not have
been understood.
Let me explain. As originally conceived, our Nation's bankruptcy
system was intended to offer a financial fresh start to honest,
hardworking Americans.
It helped encourage people to reach for goals like obtaining a
higher education, while giving them some assurance that, should fate
pull the rug out from under them, their debts will not be permanently
devastating, that they will still have a fair chance at the American
Dream.
Encouraging people to reach for their goals benefits our entire
society.
But, Congress has passed a series of amendments over the years that
have had the effect of substantially weakening the scope and value of
that fresh start. And that is particularly true with regard to debts
incurred for education.
Beginning in 1976, certain types of government-funded and
government-guaranteed student loans were made nondischargeable in
bankruptcy, with various exceptions.
In the ensuing years, Congress passed amendments that gradually
limited the exceptions, so that increasingly more types of government
student loans became nondischargeable.
With the enactment of the mis-named Bankruptcy Abuse Prevention and
Consumer Protection Act in 2005, an entirely new category of
educational loans were made nondischargeable, placing the financial
fresh start even further out of reach.
As a result of this amendment, certain privately funded student
loans can no longer be discharged in bankruptcy.
As I recall, this particular amendment was never the subject of any
formal Congressional hearing.
Thus today, four years later, we finally consider for the first
time whether this latest move was a mistake, and whether we should make
it a bit easier to discharge private student loans in bankruptcy.
With respect to the perils of private student loans, however, we
have, in a broad sense, heard this story before.
I fear that, as with the lending industry's aggressive marketing of
subprime mortgages--which drove increases in home purchases for much of
the last decade, only to result in the onset of the home foreclosure
crisis--the long-term costs of using private student loans, both for
the borrower and perhaps for our Nation's economy, may simply be too
high.
While not a perfect analogy, I see at least three possible
similarities between private student loans and subprime mortgages that
give me pause.
First, both private student loans and subprime mortgages are
subject to high interest rates and fees, leaving many borrowers with
unaffordable debt that may ultimately push them into bankruptcy.
Private student loans--like subprime mortgages and unlike federal
student loans--typically have variable interest rates.
I'm told that some of these initial rates can be as high as 19%,
and that some lenders have no maximum limit on the interest rates they
charge students.
Borrowers, as a result, are completely subject to the whim of their
lenders.
As with subprime mortgages, many student loan borrowers are young
persons with little or no credit history or sometimes with less than
stellar credit histories, which makes it easier for lenders to charge
them the worst interest rates.
Mark Kantrowitz of Finaid.org observed that 75% of student loan
borrowers receive the worst interest rates, while only 10% receive the
best.
Similarly, there are no limits on the amount or types of fees that
a private lender can charge, adding to the cost of private student
loans.
Second, both private student loan borrowers and mortgage borrowers
find that they are having difficulty in their interactions with lenders
and servicers.
As in the mortgage industry, the private student loan servicer is
usually the one who interacts with the borrower, although the servicer
is very often a step removed from the loan lender.
Just like mortgages, private student loans are usually repackaged
and sold to investors, who then have yet another financial interest in
the loan.
As with mortgagors, student loan borrowers complain of improper
billing procedures and fees, and a lack of responsiveness to requests
for information or assistance by troubled borrowers.
Private student loan lenders, like many mortgage lenders, have
demonstrated an unwillingness to provide flexibility in modifying loan
terms, such as allowing for income-based repayment, or providing even
partial forgiveness for distressed borrowers.
Third, some private student loan lenders, like some mortgage
lenders, may be engaging in what could be characterized as ``reverse
redlining.'' In effect, these lenders steer low-income and minority
borrowers into higher interest rate loans.
Such predatory lending raises the prospect that student loan
borrowers will bear the brunt of a new loan default crisis similar to
the home mortgage foreclosure crisis.
Two weeks ago, this Subcommittee held a hearing on the role of the
lending industry in the home foreclosure crisis. One of the witnesses,
Baltimore City Solicitor Suzanne Sangree, told us about her city's
lawsuit against Wells Fargo, the Nation's largest mortgage lender.
The lawsuit alleged that Wells Fargo deliberately steered African-
American borrowers towards high-cost subprime mortgages regardless of
whether the borrower qualified for better loan terms.
The result has been that home foreclosures have disproportionately
hit predominantly African-American neighborhoods very hard.
A similar kind of allegation has been leveled against the Nation's
largest private student loan lender, Sallie Mae. Two Florida student
loan borrowers allege that Sallie Mae charged higher interest rates for
minority borrowers, even though they may have qualified for lower rate
loans.
Student loan lenders admit that the borrower's school is a factor
in determining interest rates for a student loan. Lenders charge higher
interest rates for schools with high default rates.
Unfortunately, schools with a large proportion of minority students
tend to have higher default rates than schools generally.
The result, therefore, may be that lenders are effectively taking
into account impermissible criteria like race in setting unfavorable
interest rates and other terms for minority borrowers.
How should we respond to these concerns? In contrast to a home
mortgage, student loan debt is unsecured debt. Generally, unsecured
debt can be discharged in bankruptcy.
However, the Bankruptcy Code currently conditions the discharge of
student loan debt on the debtor showing that she would suffer an undue
hardship if she had to repay her student loans.
So one possible response to concerns about private student loans is
to reform the Bankruptcy Code to make it easier to discharge private
student loan debt.
Last year, I voted for an amendment to the Higher Education
Opportunity Act introduced by Representative Danny Davis, which would
have made a very modest amendment to the Bankruptcy Code with respect
to the dischargeability of privately-funded student loans.
Essentially, debtors would have been able to discharge those
student loan debts where they had been in repayment for more than five
years. This amendment would have provided some relief for debtors
overwhelmed by high-cost private student loans.
While I was disappointed that the amendment was not adopted, I am
hopeful that testimony from today's hearing will demonstrate why that
change is necessary.
I thank Chairman Cohen for holding this hearing today on the topic
of discharging private student loans in bankruptcy. I also thank our
witnesses, and look forward to their testimony.
__________
Mr. Cohen. Thank you, Mr. Chairman. I appreciate your
statement and don't hold you responsible for the other 434
people in 1976.
Without objection other Members' opening statements will be
included in the record. I would like to thank all the witnesses
for participating in today's hearing, and without objection
your written statements will be placed in the record.
[The prepared statement of Mr. Johnson follows:]
Prepared Statement of the Honorable Henry C. ``Hank'' Johnson, Jr., a
Representative in Congress from the State of Georgia, and Member,
Subcommittee on Commercial and Administrative Law
Thank you, Mr. Chairman, for holding this very important hearing on
the Bankruptcy Code's conditional discharge provision for student loan
debt, specifically the issue of discharging private student loans in
bankruptcy. It is imperative that we examine the issue of discharging
private student loans in bankruptcy, particularly in light of the
record breaking unemployment numbers that we have seen in this economy.
This is the same economy that is causing everyday Americans to go
bankrupt in order to meet basic needs. One of these needs, repaying
student debt is particularly contentious.
Student loans are unsecured debt and unsecured debt is typically
dischargeable in bankruptcy. However, the Bankruptcy Code has a
specific carve out that does not exempt student loans unless a debtor
is able to demonstrate that continued repayment of the debt would
impose an ``undue hardship'' on the debtor. In essence, this means that
current bankruptcy law treats students who face legitimate financial
distress the same severe way as people who are trying to discharge
child support debts, alimony, overdue taxes and criminal fines. We are
not discussing tax evaders or absent fathers. We are talking about
unfairly penalizing adults who twenty years ago, as naive and
financially unsophisticated 17 year olds, agreed to the dense and
confusing terms of a private loan agreement in order to get an
education and contribute to our society. And unlike with federal loans,
these individuals are often unable to work out terms that ensure a
reasonable and fair repayment schedule.
The witnesses' testimony today will make clear that questionable
practices have been used in providing private educational loans. As the
witnesses will state today, private loans are aggressively marketed to
students simply seeking education. It would be absurd for us to pretend
that every teenager in this position can reasonably be expected to
comprehend what they are agreeing to. Even if they do understand, I
question whether two thirds of these students know that they were
eligible for additional federal loans. These federal loans contain
mechanisms to ensure repayment without excessive financial distress on
the part of the borrower. I also question whether these students are
aware of the egregious racial disparities that exist in lending. For
example, my colleague from Illinois, Congressman Davis will attest to
how lending terms can be based on characteristics independent of one's
financial viability.
In short, we have a responsibility to ensure that lenders are
ethical in issuing these loans, and are only able to do so after
adequately informing the debtor of what they are agreeing to. We ensure
repayment by holding private lending companies accountable: we must
require the same repayment and distress options as federal loans, if we
provide the same protections as federal loans. Such guidelines permit
education lenders to reap a larger percentage of the original principal
and guarantees Americans access to education when they need this
support the most.
Thank you, Mr. Chairman, for scheduling this hearing. I look
forward to hearing from the witnesses and I yield back the balance of
my time.
__________
Mr. Cohen. And before we go into all that I would like to
introduce our first panel, which is a singular panel.
Congressman Danny Davis, who has been introduced already to
some extent by the Chairman, and in a way beyond what I could
do to recognize him. He represents the 7th congressional
district of Illinois.
Currently, Representative Davis serves on Committee on Ways
and Means and the Committee on Oversight and Government Reform.
He is a member of the Congressional Black Caucus, co-chairman
of the Community Health Center's Caucus, co-chairman of the
Congressional Sugar Caucus, and the Progressive Caucus, and a
man I am fortunate to serve with and know as congressman. And I
look forward to the day that I know him as something else.
Thank you, Mr. Davis. You may begin your testimony.
TESTIMONY OF THE HONORABLE DANNY K. DAVIS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ILLINOIS
Mr. Davis. Thank you very much, Chairman Cohen, Ranking
Member Franks, Chairman Conyers, Mr. Watt, Mr. Coble, all the
Members of the Committee. I thank you for holding this hearing
to examine the hardships associated with the inability to
discharge one's private educational debt via bankruptcy
As a co-chair of the Community Reinvestment Taskforce
within the Congressional Black Caucus, I thank you for the
opportunity to voice the concerns of the taskforce members
about the hardships associated with the non-dischargeability of
these debts and the likely disproportionate effect of this
policy on African Americans. Two studies released in August
raised concerns for the members of CBC's Community Reinvestment
Taskforce with regard to the bankruptcy protection afforded to
private educational debt.
A study by the Project on Student Debt found a dramatic
increase in the use of private student loans and that African
American students were statistically more likely than other
students to borrow such loans, with the percentage of African
American private loan borrowers quadrupling from 4 percent to
17 percent in the last 4 years. In addition, an analysis by
Moody's Investment Service found that private loans made
directly to students tend to have higher default rates.
Together, these reports indicate that tens of thousands of
students, and especially African American students, are relying
on private, non-Federal educational loans that lack basic
consumer protections and that receive statutory protection from
bankruptcy except under extreme circumstances, making these
borrowers much more likely to experience financial hardship
associated with private educational debt.
In addition to these studies, I have many personal stories
from borrowers who bettered themselves via education only to
experience tremendous economic hardship associated with their
private student loans, including Mandy, from Illinois, and
Laurie, from Ohio. Shockingly, one lender's representative
jokingly suggested that Laurie and her husband could sell their
kidneys to help pay off the loan.
The hardships associated with these debts and our
bankruptcy policies are neither funny nor simply business. They
are significant burdens to our citizens. Our concerns over the
privilege afforded to private education lenders are heightened
by data last week showing that racial disparities in lending
exist even for high-income borrowers earning over $100,000.
As policymakers, we want to ensure that our statutes do not
unintentionally burden particular groups of people. Private
education debt is no different than any other consumer debt. It
involves private profits and deserves no privileged treatment.
The members of the Community Reinvestment Taskforce are
concerned that current bankruptcy law penalizes borrowers for
pursuing higher education, provides no incentive to private
lenders to lend responsibly, and possible affects African
American borrowers more negatively than borrowers from other
racial and ethnic groups.
And so, Mr. Chairman, again I want to thank you and Members
of the Committee for the opportunity to be here to share these
concerns and to testify before the Committee. I thank you very
much and yield back the balance of my time.
[The prepared statement of Mr. Davis follows:]
Prepared Statement of the Honorable Danny K. Davis, a Representative in
Congress from the State of Illinois
__________
Mr. Cohen. I want to thank Congressman Davis for his
testimony and for his amendment he offered last year that I was
happy to support, glad to support. Are there any questions from
any Members of the panel for Congressman Davis?
Mr. Franks. Could I just thank Congressman Davis for being
here? Notwithstanding in my earlier comments, I certainly laud
your commitment to trying to do things that are motivated from
the right point of view, and I thank you very much for being
here, sir.
Mr. Davis. And I thank you very much, Mr. Franks, for your
comment.
Mr. Cohen. Thank you, sir. I appreciate your bringing this
issue to my attention last year with your timely amendment that
was unfortunately not successful and your continued
persistence. I appreciate your opening statement.
It looks like you are making some headway with my
distinguished and great-mind Ranking Member, and so I think we
will be working with the staff to try to bring some
legislation. Hopefully it could be bipartisan, and if not, you
know, we will just have to try to forge ahead and do what is
right.
And with that, we thank you and you are dismissed,
relieved, and allowed to vote, which we will soon join you.
We have got a vote in 15 minutes. I don't know if it is
worth trying to start the second panel. We have got a second
panel. We could try at least one witness----
The second panel, come on up. We will get started.
All right. Thirteen minutes for votes, so maybe we can get
through at least one witness, maybe two, and we appreciate your
being here.
I thank all the witnesses who are participating in today's
hearing. Without objection your written statement will be
placed in the record and we would like to ask you to limit your
oral remarks to 5 minutes.
You have got a lighting system in front of you. You have
got a button to push to turn your microphone on; light comes on
green, that means you are between 5 and 1 minute; you are into
your speech at 5 minutes and you have got at least more than 1
minute left, your yellow light means you are in the last
minute, and red means you are supposed to finish and allow us
to move on. After you present your testimony Subcommittee
Members will be permitted to ask questions, again, the 5-minute
rule.
And our first witness today will be Lauren Asher. Lauren
Asher is a nationally recognized expert on student loans and
financial aid with a very pleasant smile.
Ms. Asher is president of the Institute for College Access
and Success, an independent, nonprofit organization working to
make higher education more affordable and available for people
of all backgrounds. The institute is home to the Project on
Student Debt, which Ms. Asher helped found in 2005.
After serving in senior positions to the Kaiser Family
Foundation National Partnership for Women and Families and U.S.
Department of Labor, she founded and ran Asher Policy
Consulting from 2002 to 2005. Her clients included foundations,
national, state, and local nonprofits working to improve the
lives of children, youth, and working families.
With such a background you are like Betty Crocker, I guess.
Thank you for being here, Ms. Asher, and you may begin your
testimony.
Mr. Cohen. Punch your button.
TESTIMONY OF LAUREN ASHER, THE INSTITUTE FOR COLLEGE ACCESS AND
SUCCESS
Ms. Asher. Can you hear me?
Mr. Cohen. We can hear you, and your green light is on
which means you are running.
Ms. Asher. Thank you.
Thank you, Chairman Conyers, Chairman Cohen, Ranking Member
Franks, and all the other Members of the Subcommittee. I will
skip my introduction since you have done it for me.
Post-secondary education is increasingly essential to both
the future of our Nation and to individual Americans who seek
to enter or remain in the middle class. However, as college
costs have outpaced family incomes and available aid, more
Americans have had to borrow for their education than ever
before.
Two-thirds of all students who graduate from 4-year
colleges now have student loan debt. Most have Federal student
loans, but a growing number have private student loans as well
or instead. Last year, one-third of all bachelor's degree
recipients used a private student loan at some point before
they graduated.
Private student loans are one of the riskiest ways to pay
for college. They are expensive, mostly variable-rate loans
that cost more for those who can least afford them. Private
loans do not have the fixed rates, consumer protections, or
flexible repayment options of Federal loans, they are not
guaranteed by the Federal Government, are not part of the
Federal student loan program, and are not financial aid any
more than using a credit card to pay for tuition or books is
financial aid.
Mr. Cohen. Don't worry about the alarm. Go ahead.
Ms. Asher. Yet, despite how similar private loans are to
credit cards and other consumer debt, since 2005 they have been
treated very differently in bankruptcy. The 2005 bankruptcy
reforms also made it significantly more difficult for anyone to
declare bankruptcy while changing the treatment of private
student loans as well. Today credit cards and other forms of
consumer debt, even gambling debt, are dischargeable in
bankruptcy, but private loans are non-dischargeable, along with
Federal student loans, back taxes, child support, and criminal
fines.
Borrowers who have already met the stringent test for
bankruptcy must initiate a separate legal proceeding to prove
to a judge that repaying their private student loans would
create an undue hardship. As other witnesses will testify
today, without a high-priced attorney this is virtually
impossible to do, and even then the outcomes depend more on
arbitrary factors, like the judge before you, than the merits
of your case.
There are reasonable arguments for making Federal student
loans at least somewhat harder to discharge in bankruptcy,
although not necessarily as hard as criminal fines. For
example, Federal loans are backed by taxpayer dollars. They
offer some significant relief in situations of economic
hardship, unemployment, death, disability, as well as payment
plans like income-based repayment that can help borrowers meet
their obligations and avoid default and bankruptcy.
Private student loans have none of these benefits and are
commercial products. There is simply no justification for
putting them in the same category as Federal loans in
bankruptcy.
Giving the private student loan industry privileged
treatment in bankruptcy is particularly inappropriate. Its
predatory practices have targeted young people who have no
financial experience with deceptive marketing, high-pressure
sales tactics, and kickbacks to colleges for steering students
to these high-priced loans.
Until Congress passed legislation last year, there were
virtually no regulations to limit the dangers of private
student loans. Prospective borrowers were not even entitled to
information about the actual loan terms and costs before they
had to sign the promissory note. Even today, private loans
remain largely unregulated and the new congressionally-mandated
disclosure requirements don't go into effect until next year.
Students and families should be able to count on their
college financial aid offices for impartial advice about loans
and lenders, and most can. However, over the past few years
Federal, state, and independent investigations have exposed
numerous conflicts of interest. College officials received
gifts, trips, stock options, and other benefits from lenders.
Some colleges agreed to recommend a lender for kickbacks on the
loan proceeds.
In other cases, lenders staffed call centers and financial
aid offices posing as college representatives while giving very
biased advice about student loans. Legislation passed in 2008
was aimed at curbing such abuses but did nothing to help the
unsuspecting student already saddled with these costly loans.
Shielding private loans from bankruptcy means that
unaffordable repayment demands can extend literally forever,
even after death. It may also make lenders less cautious about
making loans to people who cannot afford them, such as low-
income students at schools with low completion rates and job
placement rates.
From 2006 to 2008, Sallie Mae increased its
``nontraditional'' subprime lending to students by 42 percent.
As default rates soared and the financial market collapsed in
2008 Sallie Mae stopped making these loans, but thousands of
American students were stuck with this high-cost debt.
In a particularly disturbing development recently revealed
in an A.P. story, some large, for-profit colleges have started
making their own private loans directly to the same high-risk
students. For example, Corinthian Colleges plans to make $130
million of such loans this year alone, made $120 million last
year, while telling investors that it expects nearly 60
percent--that is six-oh percent--of borrowers to default.
Ironically, private lenders remain fully eligible for the
bankruptcy protection that their borrowers are now denied. The
Education Resources Institute, Education Finance Partners, and
My Rich Uncle all recently declared bankruptcy. They were able
to make a fresh start regardless of why they failed. Their
borrowers deserve the same fair treatment in bankruptcy.
Thank you for inviting me to testify today, and I welcome
your questions.
[The prepared statement of Ms. Asher follows:]
Prepared Statement of Lauren Asher
__________
Mr. Cohen. Thank you, Ms. Asher. We appreciate your
testimony.
I now have the august power, which I announced at the
beginning, to declare a recess of this hearing at any time I
please. And if you noticed, my two colleagues urged me to start
the panel. They have left. I need now to vote.
The hearing is recessed.
[Recess.]
Mr. Cohen. With the august power that I have we are now
back in session. Mr. Conyers, I think, will be here in a second
and Mr. Franks will be maybe back hopefully soon; he has
another hearing.
So we thank Ms. Asher for her testimony, and now we will
recognize Mr. Rafael Pardo, who is a tenured member of the
faculty at Seattle University School of Law--which does not
have a football team--and where he went to in July of 2006.
Prior to that he was an associate professor of Tulane Law
School, 2003 to 2006, routinely teaches courses in bankruptcy
and commercial law.
Most of his research is focused on the discharge of student
loans in bankruptcy and he has been published in the American
Bankruptcy Law Journal, the Florida State University Law
Review, and the University of Cincinnati Law Review. Before
entering academia, he worked as an associate in the Business
Reorganization and Restructuring Group of Willkie Farr &
Gallagher in New York.
With that, we welcome Professor Pardo, and you may begin
your testimony.
TESTIMONY OF RAFAEL I. PARDO,
SEATTLE UNIVERSITY SCHOOL OF LAW
Mr. Pardo. Chairman Cohen, Ranking Member Franks, Chairman
Conyers, and other Members of the Subcommittee, it is my great
privilege and honor to testify today on the discharge of
student loans in bankruptcy. Much of my academic research
studies this process, and with each study I have conducted I
have become increasingly convinced that the process is horribly
broken and in desperate need of reform.
I want to begin today by providing some historical
perspective on the treatment of educational debt in bankruptcy.
That perspective underscores that we have reached the point
where we are today as a result of interest group-driven
legislation rather than sound policy choices.
Currently, a debtor may discharge student loans in
bankruptcy only upon establishing that repaying such loans
would impose an undue hardship, but this has not always been
the case. Prior to 1977, student loans were automatically
discharged in bankruptcy.
Perceived abuse of the bankruptcy system, as opposed to any
real abuse, drove Congress to change this state of affairs. A
1976 GAO report had found that less than 1 percent of all
federally insured and guaranteed educational loans were
discharged in bankruptcy. In other words, no abuse.
What did exist at the time were isolated instances of
bankruptcy filings by recent graduates on the eve of lucrative
careers. These stories were sensationalized by student loan
industry advocates and used to prompt Congress into legislating
against alleged widespread abuse that did not exist. Simply
put, a few bad apples spoiled the barrel rotten for everyone.
Over the past 3 decades, Congress has repeatedly curtailed
the bankruptcy relief available to student loan debtors. In
every instance that it has done so, there has never been, to my
knowledge, any empirical evidence presented to demonstrate
either real threats to the fiscal solvency of student loan
programs or abuse of the bankruptcy system by student loan
debtors.
The most recent change occurred with the 2005 amendments to
the Bankruptcy Code. By virtue of that legislation, for-profit
student loan lenders have been extended the special treatment
that had been reserved, up to that point in time, for
governmental and nonprofit student loan lenders.
This change did not meet with any objections from
lawmakers, even from the House Members who expressed dissenting
views to accompany the House Judiciary Committee's report on
the 2005 amendments. This episode strikes me as one of the most
emblematic instances of the student loan lobby's excessive
influence on the design of the Bankruptcy Code's student loan
discharge provision.
The upshot of the historical record is that the plight of
bankruptcy debtors who seek a discharge of their student loans
has become worse, and this has occurred without legitimate
justification. I am, therefore, greatly encouraged that the
Subcommittee is reexamining whether to undo the special
treatment that exists in bankruptcy for private student loan
lenders.
In the written testimony I have submitted to the
Subcommittee, I make four major points. First, empirical
evidence suggests that student loan debtors suffer from severe
financial distress, more so than debtors in the general
bankruptcy population.
In one of my studies, I found that the median debtor who
sought a discharge of student loans was 42 years old and would
have had to devote 2 years and 9 months of household income to
fully repay those loans--assuming, during this period of time,
that the debtor's household could live expense-free and that
the educational debt would not balloon by virtue of interest,
fees, and the like. This is a crushing debt burden, plain and
simple.
Second, the undue hardship standard for discharging
educational debt is currently undefined by the Bankruptcy Code.
As such, the standard provides minimal guidance to litigants
and judges. My studies have shown that this produces
differential treatment of similarly situated debtors, with some
granted a discharge and others denied a discharge.
Third, one of my studies demonstrates that legally-
irrelevant factors, such as the level of experience of the
debtor's attorney and the identity of the judge assigned to the
debtor's case, seemingly affect whether a debtor obtains a
discharge of his or her student loans. This raises important
access to justice concerns.
Fourth, private student loans are largely unregulated.
Borrowers of such loans often find themselves deeply mired in
debt with limited options for repayment relief. When Congress
removed the automatically dischargeable status of private
student loans in bankruptcy it stripped away the social safety
net available to borrowers of such loans. In the absence of
robust non-bankruptcy relief from private student loans, the
negative effects of litigating claims of undue hardship will
fall disproportionately on debtors with such loans.
In terms of solutions, I respectfully urge Congress to
restrike the balance between student loan debtors and lenders
of private student loans by making such loans once again
automatically dischargeable in bankruptcy. I would also urge
Congress to clarify the undue hardship standard.
The simple solution would be to create a statutory
presumption of undue hardship when a debtor does not have
enough disposable income to make his or her student loan
payments. An analogous presumption already exists as part of
the process for approving reaffirmation agreements in
bankruptcy. Writing a similar presumption into the Bankruptcy
Code's undue hardship discharge provision would strike a more
appropriate balance in a litigation process that unjustifiably
favors student loan creditors, who undoubtedly have more
resources than their debtor adversaries and who have more
familiarity with the bankruptcy system as repeat players.
These proposed solutions are important first steps to
restoring consistency in our higher education finance system,
which currently has a public-oriented approach to student loan
origination but a business-oriented approach to student loan
collection.
This concludes my testimony. Thank you again for providing
me the opportunity to testify before you today. I look forward
to answering your questions.
[The prepared statement of Mr. Pardo follows:]
Prepared Statement of Rafael I. Pardo
__________
Mr. Cohen. Thank you, Professor Pardo. Appreciate your
testimony.
Our third witness is Doug Cuthbertson. Mr. Cuthbertson is a
member of Miles & Stockbridge, a commercial business litigation
practice in northern Virginia. He practices commercial law and
contracts, consumer financial services, business torts,
intellectual property, and bankruptcy litigation, real estate,
and creditors rights.
He has represented secured and unsecured creditors in
adversary proceedings and contested matters in bankruptcy
cases. He also represents financial institutions and consumer
financial services litigation in the Federal system.
Thank you for being here with us today, Mr. Cuthbertson,
and we are going to recognize you for your testimony.
TESTIMONY OF J. DOUGLAS CUTHBERTSON,
MILES & STOCKBRIDGE, P.C.
Mr. Cuthbertson. Thank you, Chairman Cohen, and Chairman
Conyers, Ranking Member Franks, other Members of the
Subcommittee, thank you for inviting me to testify before you
today. I have been asked to appear to testify as to the
effectiveness of the undue hardship discharge provision as it
currently exists in the Bankruptcy Code. My testimony is that
of an attorney. I am not here representing a client or my firm.
The exception to the discharge for educational loans was
enacted in 1976, and the reason that it was enacted was in
response to a flood of student loan bankruptcies in which
debtors were filing for bankruptcy based almost solely on
student loan debt. The non-dischargeability provision had two
goals: to maintain the financial integrity of the student loan
system, and to curb abuses by recent graduates who have their
whole earning lives--earning capacity--ahead of them.
One reason that the exception to discharge is particularly
important for educational lenders in both the Federal and the
private system is the underwriting criteria that the lenders
use. Historically, private educational lenders have only
regarded a student's future capacity to repay.
That is in stark contrast to other types of commercial and
business loans that are made in the private sector, where
debtors will generally regard a host of factors, including
current ability to repay, credit history, future ability to
repay, the value of any collateral securing the loan. None of
those considerations are present in educational loans.
The congressional purposes of maintaining the financial
integrity of the student loan system as well as curbing abuses
of the system apply equally to Federal loans as well as to
private loans, and the Congress implicitly recognized this in
the 2005 BAPCPA amendments, when it amended Section 523(a)(8)
to include qualified educational loans. That includes most
private loans, so Congress has treated them both the same.
And it is important to recognize, I think, that private
loans supplement the Federal loans. They are meant to be a
supplement to cover the college--the rise in college costs, and
they are rapidly. And so private loans have become an important
source of additional funding for education for students.
Without the undue hardship standard, borrowers could enjoy
the benefits of their education without having to repay their
loans--without even attempting to repay their loans--by filing
for bankruptcy immediately upon graduation. In the private
sector private loan industry there is concern that this would
lead to one of three consequences: first, that private loans
would no longer be made; private sector lenders would no longer
make private educational loans.
You know, they could also require a cosigner or tighten up
credit granting criteria. And then the third concern that has
been expressed to me is that students would simply use private
loans instead of Federal loans, knowing that they are fully
dischargeable immediately upon graduation.
Congress has not defined the term ``undue hardship,'' which
has led to judicial interpretation of that term and reliance on
case law. The grounds generally include illness, incapacity,
extraordinary or unique circumstances, like, just, you know,
total permanent disability, provision for dependent children,
et cetera.
But it is important to note that since it was not defined
in the code the case law has developed--a well-developed body
of case law, frankly--has developed--and the inquiry is very
factually-intensive and it requires a trier of fact to make
these determinations. The bankruptcy judges here, who are the
triers of fact, are in the best position to evaluate the
circumstances of each particular debtor's case.
The standard works relatively well, but I will say because
of the factually-intensive nature of the inquiry, there will be
more compelling stories, you know, that--where students have
not received a discharge. Equally, there will be compelling
stories where they have. So it varies on a case-by-case basis,
but that is the only way it can in our system of litigation.
I would also point out that bankruptcy is a last recourse
for debtors. There are certain other administrative benefits
that they can avail themselves of to mitigate student loan
debt.
Chairman Cohen, Representative Franks, thank you for the
opportunity to testify before you today. I will be happy to
answer your questions.
[The prepared statement of Mr. Cuthbertson follows:]
Prepared Statement of J. Douglas Cuthbertson
__________
Mr. Cohen. Thank you, Mr. Cuthbertson. I appreciate your
testimony.
Our final witness, our cleanup batter, is Brett Weiss. Mr.
Weiss currently heads the Bankruptcy and Insolvency Group at
Joseph, Greenwald & Laake. He is experienced in all the
chapters--11, 13, and 7. And he has represented individuals,
corporate debtors, and creditors in all phases of bankruptcy.
We thank you for your willingness to testify, and would you
begin your testimony?
TESTIMONY OF BRETT WEISS,
JOSEPH, GREENWALD & LAAKE, P.A.
Mr. Weiss. Thank you, Mr. Chairman, and Members of the
Subcommittee. Good afternoon. I am Brett Weiss, a bankruptcy
attorney from Greenbelt, Maryland.
I appear today on behalf of the National Association of
Consumer Bankruptcy Attorneys, NACBA, and the National Consumer
Law Center, NCLC. NACBA is the only national organization
dedicated to serving the needs of consumer bankruptcy attorneys
and protecting the rights of consumer debtors in bankruptcy.
The nonprofit NCLC specializes in consumer issues and has
established the Student Loan Borrower Assistance Project, which
provides information about student loan rights and
responsibilities.
I appreciate the opportunity to speak with you about an
issue I deal with on a daily basis: the harsh treatment of
student loans in bankruptcy. Most Americans see a college
degree as the single most important factor for financial
success and a place in the middle class, but with skyrocketing
tuition and related expenses, more and more students are forced
to turn to loans to pay for that education.
I have three teenaged daughters. One is a college freshman,
another a high school senior, and a third is in her last year
of middle school. I can't afford out-of-state tuition and costs
for all three--over $120,000 each for 4 years. And that isn't
even for a top-tier college, where those expenses can easily
run $50,000 a year, $200,000 at the time of graduation.
Two-thirds of all college students borrow money to pay for
college, and due to high tuition and low Federal loan caps, an
increasing number take out private student loans. What
borrowers are finding is that there is no margin of error when
it comes to student loans. Students who choose public service
or other low-paying careers or whose education doesn't provide
the opportunities they expected too often begin their adult
lives with student loans they can't pay, creating a financial
black hole from which they may never emerge.
I see these people in my office every day, and since the
2005 bankruptcy law gave private student loans the preferential
treatment previously reserved for government-guaranteed student
loans, there is little I can do to help. These loans are not
dischargeable except under very extreme circumstances, and even
there there is a very high cost for them to be able to pay an
attorney to represent them in the protracted litigation that
Mr. Cuthbertson referred to.
Private student loans are huge profit centers for lenders
while student often find themselves loaded with high-interest
rates and mountains of debt. Indeed, interest rates and fees on
private loans can be as high as those on credit cards, and
unlike Federal student loans, there is no limit on the size of
the private loan and minimal regulation of their terms and
costs.
Like other private loans, private student loans are made
and priced based on risk. There is simply no public policy
justification to treat this one type of private loan
differently by denying a discharge solely because of how the
money is used.
The discharge is a fundamental purpose of individual
bankruptcy, providing the unfortunate but honest debtor an
important fresh start. Exceptions to discharge should be
carefully considered and adopted only when necessary to further
other important policies. Because private student loans are
usually made at market rates and on the same basis as other
loans, we see no reason to give them special treatment in
bankruptcy.
Some raise the illusory argument that without this special
treatment private student loans will become more expensive and
less available. Allowing discharge in bankruptcy won't affect
their ability--availability, however, anymore than, as Mr.
Chairman noted, allowing the discharge of credit card debt and
mortgage debt restricts the availability of those types of
loans.
The private student loan industry was expanding rapidly
before the 2005 amendments. That expansion likely would have
continued regardless.
And even after giving them the additional protection in
BAPCPA, we did not see expanded availability or a reduction in
interest rates. This suggests that there will be minimal, if
any, reduction in lending if the law is returned to its pre-
2005 status and private student loans become dischargeable once
again.
You have already dealt with businesses that are too big to
fail. Let us not forget those who currently seem to be too
small to help.
NACBA and NCLC urge this Subcommittee and the full Congress
to repeal the preferential treatment extended to private
student lenders in the 2005 amendment. Thank you very much.
[The prepared statement of Mr. Weiss follows:]
Prepared Statement of Brett Weiss
__________
Mr. Cohen. Thank you, Mr. Weiss.
And I want to compliment our panel--the first panel we have
ever had to conclude on the red light. And I recognize myself
now for 5 minutes of questioning.
Professor Pardo, you mentioned a couple possible
legislative suggestions. One of them was to clarify, change,
make constant the definition of undue hardship, I believe, and
the other was maybe the 86 on the undue hardship, get rid of
it.
Those are different solutions. Which do you think is
preferable?
Mr. Pardo. Well, based on what my studies have shown me and
in an ideal world if we could start from scratch, I would say
that all student loans should be dischargeable in bankruptcy.
But I realize we are not at that point today; it might be hard
to unscramble the egg.
So I propose two solutions. I think the ideal at this point
is to undo the preferential treatment for private student
loans, and at the same time recognize the difficulties other
student loan debtors face in bankruptcy--those who borrow from
the Federal Government or nonprofits and the difficulties that
they face in litigating their claims of undue hardship--and
therefore clarify the standard.
So really, two proposals: If you are going to take the
steps to get rid of private student loans, at the same time
also introduce legislation that clarifies the undue hardship
standard.
Mr. Cohen. So you think we need to do both, clarify the
undue--one, clarify the undue hardship standard, and two?
Mr. Pardo. Make private student loans automatically
dischargeable.
Mr. Cohen. Well, if they are automatically dischargeable
where would you have the undue hardship rule?
Mr. Pardo. The undue hardship rule would continue to apply
for either--loans made by the Federal Government, or made by
nonprofits, or guaranteed by the Federal Government, or
guaranteed by nonprofits.
Mr. Cohen. Okay. Okay. I like your analogy. You know, I
have heard about making sausage. I had never heard about the
scrambled egg, but now we have got all of breakfast together
here in Congress.
Mr. Cuthbertson, I appreciated your testimony, and you have
a different perspective, and I understand where you are coming
from. And without assuming that your premise is something I
concur in, the idea that somebody could mount up a lot of debt,
not have gone in the income world, and discharge their debt and
then go on and earn their, you know, great bonuses and whatever
in the private world of life and income doesn't seem equitable.
Last year Danny Davis' amendment was, like, only could
discharge it after 5 years, I believe. Is there some time limit
that you think might be agreeable to where we could get the
minority to agree to us to make a good egg?
Mr. Cuthbertson. Well, I think the law used to contain a
time limit in the 1990's, and it was gradually tightened over
the years as part of the Clinton administration-supported
amendments that changed it from--it had been 5 years and then
it was changed to 7, and now taken out altogether. Sure, that
is a possible solution. Congress would be--you know, it would
be a reasonable exercise of Congress' power----
Mr. Cohen. Well, we could do a lot, you know, wars--neither
here nor there. What do you think would be a reasonable
solution to balance that? I mean, you are coming not
representing a client, all of a sudden you are the czar.
Mr. Cuthbertson. Well, I think I would agree with Professor
Pardo that if Congress is going to do anything--take any action
in this area--that it should clarify the standards for undue
hardship under the code. I think that is what would be most
beneficial.
If the concern is, you know, a lack of uniformity across
the circuits across the country and the concern is the judges
are applying their judicial discretion in a manner that is not
uniform, then Congress could provide direction setting out the
standards for undue hardship.
Mr. Cohen. Have any or all of you, or which of you have
submitted any proposed definition? Have any of you submitted
that? No? You could all do that though.
Mr. Pardo. I have pointed in my written testimony to
looking at the presumption that exists for undue hardship in
the context of the approval of reaffirmation agreements in
bankruptcy. So a reaffirmation agreement is when the debtor
proposes to repay a debt that otherwise would have been
discharged.
If that agreement is to be approved and have legally
binding effect, one of the things that must be shown is that it
will not impose an undue hardship on the debtor, and with the
2005 amendments Congress included a presumption that basically
says, if the debtor's disposable income is insufficient to
repay the proposed payments in the agreement there is a
presumption of undue hardship, meaning the agreement will not
be----
Mr. Cohen. So you think that one flies----
Mr. Pardo. I think that would help a lot in two ways. One
is, it would concentrate, again, the analysis of undue hardship
on financial criteria, which I have found in my studies aren't
driving outcomes. And really, if you look at both of those
provisions they ask, ``What is the effect of having to repay a
loan?''
Mr. Cohen. I am going to ask each of you, if you would
after the Committee, to give me what you think is an
appropriate legislative remedy on this definition.
Ms. Asher, what do you think about Mr. Cuthbertson's
suggestion that these folks can mount up this large debt, wipe
it out, and then go on and get into some get-go world?
Ms. Asher. Well, I think Professor Pardo has already
addressed the fact that there was no evidence of abuse of
bankruptcy by student borrowers of either type before the
bankruptcy laws changed, so I wouldn't expect that to be any
different. You have to meet very stringent criteria for
bankruptcy, and if you are--if you borrowed something
fraudulently it is not eligible for discharge, even under
regular discharge rules.
Mr. Cohen. But you wouldn't have borrowed it fraudulently.
You would have borrowed it with all good intents and then you
graduated and said, ``Hey, I can start clean.''
Ms. Asher. Bankruptcy and default are not exactly clean;
they have very serious and long-term financial consequences.
They can make it hard to get a job or rent an apartment, or do
any of the other things that you would need to do to enjoy the
benefits of such unlikely behavior. But I am not a bankruptcy
lawyer.
So I can say that there--in the industry we have already
seen, because of the credit crisis, a significant increase in
credit standards and the requirement of cosigners for almost
all private loans. While there was some contraction in the
industry because of the credit crunch and some very highly
leveraged lenders that were making, in many cases, some very
high-risk loans, Sallie Mae, Wells Fargo, Citibank, and
increasingly credit unions and now some schools are very much
still in the private loan game.
There was huge growth, as I think Professor Pardo noted,
from 2007--from 1997 to 2005 the private loan industry grew--
volume grew by 800 percent. That was without the benefit of
this special treatment in bankruptcy.
The industry seems to have a lot of profit opportunity.
Sallie Mae still projects that it is going to make a third of
its profits or more from private loans, so I think that some of
the concerns are either overblown or have already been
addressed by a market correction.
Mr. Cohen. Mr. Cuthbertson, are you familiar with Professor
Pardo's study?
Mr. Cuthbertson. Yes, Chairman, I am.
Mr. Cohen. Where do you question it?
Mr. Cuthbertson. Well, I guess I question the conclusion
that Professor Pardo reaches that because--if you accept the
premise that the undue hardship standard is not being applied
uniformly by bankruptcy judges that therefore we should just do
away with the undue hardship standard and make private student
loans automatically dischargeable.
I think, as I said, I think if there is a problem with the
application of the standard, Congress can give further
direction on what the undue hardship standard should entail. I
don't think it necessarily follows that you just scrap the
undue hardship test altogether.
I also would take exception, I think, with the significance
placed on what Professor Pardo has called ``extralegal
factors,'' those being the experience level of debtor's
counsel, creditor's counsel, bankruptcy judges, predispositions
to certain issues. I think those things are part and parcel of
our system of litigation, and that happens in every court, and,
you know, there is nothing inherently wrong with that. That is
the way that every individualized factual determination has to
be made, and those factors come into play in all types of
litigation.
Mr. Cohen. What about his suggestion--and Ms. Asher seems
to concur--that there was not a problem with student loans in
the past and that there has only been a few exceptions that
were highlighted to make it look like there was abuse?
Mr. Cuthbertson. Well, I guess I can only say that that is
the--that was the stated purpose in 1976, and I don't have
empirical data to support that there is a lack of abuse or not.
Mr. Cohen. Thank you, sir.
Mr. Cuthbertson. I would be happy to supplement the record.
Mr. Cohen. Everybody has an opportunity to do it and we
would be happy to have your remarks, as you will find out
later, to submit later to amend it. Thank you.
Now that I have taken over my 5 minutes and been a very
poor example to the witnesses who did so good, I recognize my
Ranking Member, Mr. Franks.
Mr. Franks. Well, thank you, Mr. Chairman.
Mr. Cuthbertson, I suppose that in nearly every business
endeavor where there is some type of contractual arrangement,
and especially if it is a financial one, that the Bankruptcy
Code tries to make a balance between trying to, you know,
encourage people to pay their debts and to make it a hard route
for them to simply discharge it, and yet to be able to have a
pressure relief when it is simply--the hardship exists and is
simply not reasonable to press forward. Obviously as someone
who has been in business in the past, it occurs to me that
those people who make the loans take that balance as probably
one of their central elements of calculus when they decide
whether to make a loan or not.
And that being said, do you think that if the Congress
clarified the undue hardship provision so that rather than
changing--you have got private loans; you have got nonprofit
loans; you have got Federal loans. If we had that as a
consistent definition in all of them, don't you think that that
would be at least a better way to have a consistent lending
practice, first of all?
Mr. Cuthbertson. Yes, I do, because the considerations that
make--that Congress has taken into account to make educational
loans non-dischargeable apply equally to Federal loans as to
private loans. They are both there to ensure access to higher
education and its important public policy the Congress has
deemed important and to, you know, to make funds available for
students to attain a post-secondary education. So, whether it
is a Federal loan or a private loan, they are both serving an
important public and societal good.
Now, I do think that if you look at taking away non-
dischargeability for private loans you have still got the
problems that are alleged with the application of the undue
hardship standard for the Federal loans. So I think that I
agree with your assessment. We should--Congress should look at,
if it is going to do anything, making that standard clear for
all loans.
Mr. Franks. Well, it occurs to me that if we make
bankruptcy--the easier we make bankruptcy, it occurs to me that
the more we will have bankruptcy, given that there is pressure
on all of us to, you know, to try to discharge our debts if
there is an easy way to do it. Now, do you agree with that,
just kind of an affirmative or negative?
Do you think that making bankruptcy--this will make
bankruptcy easier if we pass legislation doing away with the,
you know, the system as it is now? Do you think that this will
make bankruptcy easier?
Mr. Cuthbertson. Yes, it----
Mr. Franks. And do you think that that will increase the
incidence of bankruptcy?
Mr. Cuthbertson. It would increase the incidence of--well,
yes, bankruptcy in--well, in general and the petitions to
discharge educational----
Mr. Franks. Right. Well, I think it is a, you know, maybe
it is just an old-fashioned perspective, but I think it is
probably not a good thing for students to start out in life
with a bankruptcy on their record, just for their own
intellectual standing. It just has a negative effect.
And I do think that you are right, that this will increase
bankruptcy, and that can't be a good goal--I don't think it
is--because if you increase bankruptcy then you put greater
costs on the system. That is inevitable no matter how you face
it; somebody has to pay for that.
Now, I know that some of our liberal friends--and I say
``friends'' and I really do mean that. I know they don't like
the word liberal, but some of our friends on the left here
can't seem to take--can't seem to understand that you don't
have a free lunch. You just, you know, if there is losses that
the system has to compensate for that.
So if Congress amends the Bankruptcy Code to allow private
student loans to be unconditionally discharged, will anyone
other than private lenders have to bear the cost of this change
in the law? In other words, will there be ancillary impact in
other areas? Will this make it easier to gain student loans in
the future?
Mr. Cuthbertson. No. I think I agree with what you said.
You know, lenders do take loss expectations into account in
pricing their loan products, and if there are greater than
expected or anticipated losses interest rates will go up, or
the credit-granting criteria will be tightened and----
Mr. Franks. Wouldn't it be the most naive lender that would
not take that into consideration? I mean, you would flunk
Banking 101 if you didn't take your loss ratio into
consideration.
Mr. Cuthbertson. I don't know of any lender that wouldn't
take that into consideration.
Mr. Franks. Well, I guess, Mr. Chairman, I won't belabor
the point here, but I really am convinced that we could deal
with the hardship issue effectively. I mean, I am concerned
that we might go one way or the other too far. But the idea of
making bankruptcy an easy option--and I think this makes it
easier--I think not only increases the incidence of bankruptcy,
but in the long run it puts additional burdens on the system
which, in the final analysis, will mean less money available
for student loans and more bankruptcy among our young people.
And unfortunately, I wish there was an easier way to do all
of this, but the market sometimes seems to have a wisdom that
those of us in government just can't possess no matter how hard
we try. And so with that I will yield back.
Mr. Cohen. Thank you.
Since I am the only one here I----
Mr. Cohen. Well, I don't mean that. I just think that the
reference to liberal and left, I don't know. I think
``liberal'' is better than ``left.'' I am not sure, but I don't
know where it was directed.
Anyway, Mr. Coble, you are recognized from North Carolina.
Mr. Coble. I was to Mr. Frank's left.
Mr. Cohen. I noticed that.
Mr. Franks. You have lots of ground over there, though.
Mr. Coble. Good to have the panelists with us.
Mr. Cuthbertson, maybe I am missing something, but I want
to extend partially on Mr. Frank's line of questioning. What
lender is going to make student loans if the borrower can file
Chapter 7 the day after graduation and thereby fully discharge
the debt, especially given that the means test, as I understand
it, would be a nonissue for someone that is a borrower with no
prior or very low levels of employment income? Wouldn't it be
hard to find anyone coming forward to make a loan under those
conditions?
Mr. Cuthbertson. I think that is certainly the concern
amongst private sector private loan lenders, yes.
Mr. Coble. And some of the testimony today is that private
student loans are more akin to credit cards than to financial
aid. What steps, outside of bankruptcy, can the Congress take
to make private student loans more like Federal student loans
and less like credit cards? I will start with you, Mr.
Cuthbertson.
Mr. Cuthbertson. I think, well, Ranking Member Franks
mentioned in his opening remarks maybe a more comprehensive
reform, if there are abuses in the system, disclosure
requirements, regulations that would extend benefit programs to
private loans, those types of things would equalize the playing
field, I think.
My way of thinking is that if you are going to do a
bankruptcy reform it is very limited. If there are true abuses
in the system then there are things that maybe Congress could
do other than limiting it to taking away the discharge
exception in bankruptcy.
Mr. Coble. Well, that was sort of my thing.
And Professor, let me bring you in on this. To extend the
question somewhat, if private student lenders are, in fact,
engaged in abusive or misleading lending practices, would we
not be better in the Congress to regulate those practices than
simply making private student loans dischargeable in
bankruptcy?
Mr. Pardo. Well, something has to happen, so the problem
with the private student loans is that they don't really offer
the same robust avenues for relief from financial distress
outside of bankruptcy that Federal loans do, for example, a
government loan.
So if you are not going to have those you have to have some
sort of social safety net, and currently really the only safety
net is bankruptcy, but it is hit or miss with how an undue
hardship discharge proceeding comes out.
So student loans borrowers who have private student loans
who can only look to bankruptcy for relief, are going to be in
a much more difficult situation than borrowers of Federal
Government loans.
Mr. Coble. Mr. Chairman, and I say to the panelists, I am
not without compassion, but I have some problems about just
willy-nilly discharging debt. That sort of hangs in the craw,
Mr. Chairman, and I am not sure that I have any solution.
Anybody else want to be heard on this?
Mr. Weiss. With due respect, that just isn't going to
happen. It is not going to happen because the system, as it is
currently constituted, would not allow a student immediately
upon graduation, and as some of the apocryphal stories went, on
the eve of being employed in a high-paying position, to go
ahead and discharge their student loans, their bad save issues.
And the judges I practice before, and I suspect the judges
that virtually all of my colleagues practice before, would not
allow a discharge to occur under those circumstances for the
reason if the 2005 act is rolled back, we have the 7-year delay
from the date that the loan first became due before it could be
discharged in a Chapter 7.
Mr. Coble. Well, Mr. Weiss, how about the student who is
not employed, does not have employment of a high-ranking firm?
Mr. Weiss. Well again, if we go back to the previous law
they would not be able to file immediately upon graduation, and
I believe one of the reasons why that time period was imposed
was to prevent exactly the types of situation that you are
referring to.
I don't think anyone at this table, any of the bankruptcy
practitioners nationally would believe that it would be
appropriate for a student, absent extraordinary circumstances--
severe illness, incapacity, et cetera--to be relieved from
their obligation to repay their student loans immediately upon
graduation.
Mr. Coble. Thank you, Mr. Weiss.
Let me bring Ms. Asher in before my red light illuminates.
Ms. Asher. I think it is important to, in addition to the
fact that----
Mr. Coble. It just illuminated, but I guess the Chairman
will go along with us.
Ms. Asher. Is that all right?
Students are actively pursued by credit card companies even
though that debt is dischargeable in bankruptcy. I think--
again, I am not a bankruptcy lawyer, but ``automatically
dischargeable'' is not really how things work. You still have
to prove that you can't afford to pay off your particular
debts, and they are subject to some considerable review within
the regular bankruptcy process even without the added standard
of undue hardship.
But more importantly, there are such major distinctions
between private loans as a product--a financial product--and
Federal loans that we need to look at them in the context of
how we treat other kinds of debt, like credit card debt, like
even in extreme cases gambling debt, in thinking about how
people approach bankruptcy.
Certainly credit card companies have continued to pursue
these very same kinds of students based on assumptions of
future earnings, even without being treated in this unique way
that private loan companies are.
And in fact, it has taken an act of Congress to help
constrain some of the most extreme and abusive marketing
practices. I would say in this context there may be things that
Congress should consider broadly, beyond this jurisdiction, to
reign in some of the most abusive and consumer-unfriendly
practices in the private loan industry.
Nevertheless, borrowers of all kinds of debt are in need of
that ultimate relief of bankruptcy should they reach those
extreme financial circumstances where it is their only
alternative.
Mr. Cohen. Thank you.
Thank you, Mr. Coble, who comes from one of the highest,
probably, expenses of the public plan in education, University
of North Carolina--great school, good public plan.
Professor Pardo, tell me a little more about your study.
Did it go into the issues of whether or not a lot of student,
when they graduated, used bankruptcy to wipe out this debt?
Mr. Pardo. Well, I will cite two statistics: one, the
median age of the debtor in my study was 42 years old; the
average age was 45 years old. These are not people who are
recent graduates on the eve of lucrative careers who have a
lifetime of employment ahead of them. These are folks who have
been trying to make a go of it for a long time and they just
can't make ends meet, and they are under crushing debt burdens
and so they looked to the bankruptcy forum as their avenue for
relief.
Mr. Cohen. Before the undue hardship rules--2005 for the
private world and maybe I guess it was 1976 for the--was there
some large number of folks using the bankruptcy----
Mr. Pardo. Again, this very Congress commissioned a GAO
report to delay the effective date of the provision that would
make student loans conditionally dischargeable so it could see
what had been happening in bankruptcy when they were
automatically dischargeable, and the GAO report commissioned by
this Congress found that less than 1 percent of all federally
matured student loans were discharged in bankruptcy.
Mr. Cohen. And that covered what year, or years?
Mr. Pardo. 1975 and 1976.
Mr. Cohen. Okay. And those were Federal loans?
Mr. Pardo. Yes.
Mr. Cohen. Was there a study on private loans? Was that not
an issue?
Mr. Pardo. It wasn't an issue----
Mr. Cohen. They didn't have the undue hardship rule at the
time?
Mr. Pardo. There wasn't the undue hardship rule, but the
private student loan market really was not at the point it is
today.
Mr. Cohen. Well, prior to 2005 when the private loans
were--when the undue hardship rules applied there--prior to
that were there a lot of private loans that were being
bankrupted?
Mr. Pardo. I don't know the answer to that.
Mr. Cohen. Does anybody know the answer to that?
Mr. Cuthbertson. I don't know the answer but I think that
there probably weren't. I would suspect there weren't because
the private loans and the private sector private loans have
really taken off in response to the rapidly increasing cost of
college education and the caps on the Federal programs. Federal
program loans do not cover the entire cost of college education
in most instances.
Mr. Cohen. Well, 2 weeks ago--and I don't know if this is
really necessarily on point; I think it is, though--we had an
economist named Joseph Mason, and he testified before this
Subcommittee that by making the discharge of debt in bankruptcy
more difficult, the bankruptcy BAPCPA 2005 emboldened leaders
to act recklessly in their lending practices, ultimately
leading to the onset of the home foreclosure crisis. And he
suggested possibly there was some similarity in what might be
going on in private student loans.
Do you think that is--do you have any reason to believe he
is wrong?
Mr. Cuthbertson. I can't really speak to that issue. I
don't have any reason to believe he is right or wrong,
Chairman. I don't have any information----
Mr. Cohen. Ms. Asher, do you have any thoughts on that?
Ms. Asher. Yes, I do.
Mr. Cohen. Surprise, surprise.
Ms. Asher. In 1997 the National Bankruptcy Review
Commission, which is a bipartisan commission founded by
Congress, determined that there was no evidence to support the
assertion that students systematically abused dischargeability
in bankruptcy.
As to your question about--forgive me, I have just
forgotten the second part of the question. Oh, did lenders make
riskier loans after 2005? There is some evidence that the
answer is yes. Sallie Mae dramatically increased its portfolio
of nontraditional subprime loans during that time, as I
mentioned in my oral testimony. It is also spelled out in my
written testimony. Finding, not surprisingly, that these very,
very high-risk loans turned out to have very high default
rates, it then got out of that business in 2008 when there was
less access to easy credit and to the securitizations that
allowed lenders throughout the economy to make loans to people
who they knew couldn't afford them, often under false
pretenses, and walk away without having to respond to the risk
because they had been sold down the chain.
Mr. Cohen. You mention in your testimony, or maybe in
response to a question, something about cosigners--private
loans and they can be discharged--or Federal loans, for that
matter, but private loans particularly--and they have got a
cosigner. Are most of them requiring cosigners now?
Ms. Asher. Virtually all require cosigners. There are----
Mr. Cohen. And the cosigners--they don't get out in
bankruptcies, do they?
Ms. Asher. They are completely on the hook.
Mr. Cohen. So then how does--so if the student can go ahead
and get out of their debt to the lender, which is what this
would--Mr. Franks' fears would happen--but the lender still
gets their money because they have got this solvent cosigner,
Mr. Franks should be happy because the lender is still making
money and they have got this cosigner on the hook, and the
cosigner can always go after--well, the cosigner might not--
they couldn't go after the debtor, or could they later on?
Ms. Asher. The cosigner is subject to all the same
conditions of the contract as the primary signer, and that
includes no discharge in the case of death or disability. I
know that someone that we work with a lot, Deanne Loonin, who
wasn't able to be here today, has a client, a parent who has a
child that had a permanent brain injury, and that loan is not
dischargeable another--even under that circumstance, while the
student's Federal loans were.
Another instance where the parent cosigned--actually, I
think in this case it might have been a spouse, and the primary
borrower died before he could finish his education. Again,
absolutely no relief.
And unfortunately, because of the way these loan contracts
are structured, very differently from Federal loans, the
borrowers are really at the complete mercy of the private
lender in trying to negotiate any kind of accommodation. And
when bankruptcy is the only possible relief left, they are left
with this very arbitrary and onerous process which is not based
on the merits of their case.
Mr. Cohen. Mr. Cuthbertson, what about that? When you have
got a cosigner, doesn't that kind of give the lender some
solace?
Mr. Cuthbertson. Yes, Chairman, I believe it does, and that
is probably why they are requiring cosigners, because that
makes--you know, that makes the borrowers--makes the repayment
of the loan more likely.
Mr. Cohen. Even if the borrower can bankrupt it?
Mr. Cuthbertson. Well, yes, because then you have a
cosigner who----
Mr. Cohen. So then isn't this all kind of semi-academic,
except for the fact that the college students could be left on
the hook and, you know, if they want to go bankrupt then they
can only go bankrupt for seven--you know, they have got this
time limit, they can't do it again, they got it on the record,
they got trouble renting an apartment, getting a job, whatever,
unless they work for their parents in which case they got an
apartment and they got a job. The borrower is, you know, not
out at all.
Mr. Cuthbertson. Well, the co-obligor, or the cosigner, I
think the issue there would come down to how would that present
an undue hardship on the cosigner, and that it would be
dischargeable or non-dischargeable in bankruptcy to the same
extent as it would be by the student.
Mr. Cohen. Right. But don't you think, like, then the
cosigner is not going to be--maybe I am missing something here.
The cosigner is not going to be discharged in that bankruptcy.
Mr. Cuthbertson. Not without showing an undue hardship.
Mr. Cohen. And the borrower just has to get a cosigner that
has got some capital, some reserves, which I presume they do
anyway. So in reality, there is not going to be a problem. They
are going to get a cosigner that is several years older or
already making money, got an income stream, got some real
property that they can attach, and they are going to be happy.
Mr. Cuthbertson. Well, assuming they can do that. I mean,
most--you know, most students who are applying for college
loans are 18 and are----
Mr. Cohen. Yes, but they are not getting their girlfriend
to sign, or their boyfriend. I mean, they are getting some
older type that is willing to help them get through life.
Mr. Cuthbertson. Right.
Mr. Cohen. Mr. Weiss, is this kind of maybe--isn't the
cosigner the answer to the problem?
Mr. Weiss. Yes and no. You are absolutely correct that if
the borrower files for bankruptcy and is discharged then the
lender can go after the guarantors and, you know, when I
applied--when my daughter applied for a student loan they
needed a guarantor and, you know, that was me. So I am very
familiar with that process.
One issue that has been spoken about is that people would
view bankruptcy as an easy option and sort of willy-nilly, oh,
what the heck, I will go ahead and file for bankruptcy. That is
so far from reality, with due respect, that it is just
absolutely dead wrong.
The people who come to see me to file for bankruptcy would
rather have a root canal without anesthesia than talk to a
bankruptcy lawyer. They are embarrassed; they are ashamed; they
have been trying for years to live up to their obligations and
pay their bills, and they only come to see me when they are
completely incapable of doing that.
Student loans are not the primary factor for bankruptcy.
Student loans are sort of in the mix for a client who has been
ill, or had job loss, or their business went down the tubes,
largely due to factors outside of their control. People very,
very rarely--and the data justifies this--file for bankruptcy
because of a student loan. It is merely one debt that is in the
mix.
Mr. Cohen. I would like to yield to my Ranking Member, who
maybe has seen the red light.
Mr. Franks. Thank you, Mr. Chairman.
Ostensibly, when we began this hearing, this was about, at
least to some degree, how to make it easier on students. In
other words, we were trying to assist students here. And even
though I made the case as best I could that I believe in the
long run this will hurt a larger number of students--it might
help some in a challenging situation now, but I think it will
be to the detriment of a larger number of students. That is my
personal opinion.
But now I hear about the cosigners. Sure sounds like we are
all of a sudden now encouraging an entire class of people to
take bankruptcy. And I am not sure that that is good for the
system either.
If we make it--the more we make--the easier we make
bankruptcy--I agree with Mr. Cuthbertson's statement: The
easier that we make bankruptcy--and again, ask whether it is
the right thing or not--but the easier we make it, I think the
more we increase the chances of the loans not being paid back.
And if we increase the default rate, if we increase loans not
being paid back, that money has to go--I mean, has to come from
somewhere, and I believe that that will decrease the available
amount of capital for loans.
Now, you know, we talked about credit cards. Sometimes
maybe somebody takes out bankruptcy for credit cards might have
maybe four or five credit cards, $5,000, $6,000 a piece because
there is a certain cap on credit card lending. But as Mr. Weiss
pointed out, you know, some of the college education is now
around $200,000. Well, that is not far from the median price of
a house.
And, you know, if we expect people to make these high-risk
loans of up to, you know $100,000 or $200,000, for a very good
purpose, which is to help our young people get education, but
if we expect the money to be there for them, if that is our
purpose, then the more we weaken the system by which they can
make some type of common sense calculation, or at least have
some confidence that they are going to be repaid, the less they
are going to do that. It is fundamentally simple. I wish it
weren't.
I wish there was some way to turn lead into gold. I really
do. But unfortunately, reality will prevail in this situation,
as it always has.
You mentioned, Ms. Asher, related to the--what did you call
it the Sallie Mae--where a lot of the loans that were made were
not really very sound loans. Well, now, you know, there was an
awful lot of pressure on people to make loans that weren't
sound, and did that help the people who got the loans? Probably
not. Didn't help them much because those loans weren't sound
and they ended up getting in trouble anyway. And did that hurt
everybody else? Yes, I think it did.
If you apply it to the mortgage industry it was the central
element of the entire economic meltdown. It is okay to blame
Wall Street for some of the bad things they did; they did a lot
of bad things. But they essentially took loans that were rated
a certain way and repackaged them and sold them off--and I
think there is some big problems with that--but they took these
loans and they repackaged them.
If the loans had performed as those who rated the loans
said they would, all of the problems could have fundamentally
been eradicated. There wouldn't have been a meltdown if the
loans had performed but they didn't.
And I think that we have to realize that there are about
three or four factors that give us the best chance of seeing
loans perform. One is, people have to be able to make a
calculation saying, ``Okay, this person, they don't have a job
right now,'' or whatever, they have to make a calculation on
the person's ability to repay the loan, with cosigner's help or
not. Secondly, they have to make a calculation whether or not
the loan can be profitable to them to make it at a certain
interest rate.
And all of these calculations have to be in place before
they make the loan, before any of it happens. And if we tinker
with the Bankruptcy Code in ways that will weaken that system--
I know there is a balance, but if we tinker with ways that will
weaken the system I think we will hurt students in the long
run.
And fundamentally I am hoping--and I am going to let this
be my last word to the Chairman--I am hoping that we can do
something to define undue hardship in a way that is in
comportment with both of our values and with common
mathematical sense that a businessman or a business individual
can make an empirical calculation on so that they can make
these loans.
I think we will be hurting the student loan program in the
long run or allowing government--or forcing government, as it
were--to supplant that, which, in the long run, the way things
are going, someday won't be there and there will be a day of
reckoning that will hurt an awful lot of people in a big way.
And I think we will all be the worse for it, and that
example has been repeated throughout history. The highway of
history is littered with the wreckage of systems that thought
government could come in and run it better than the private
market based on common sense principles.
And with that, Mr. Chairman, I yield right at the light.
Mr. Cohen. Thank you, Ranking Member. We appreciate your
apocalyptical analysis. Yes----
Mr. Franks. I have never heard of that word.
Mr. Cohen. Yes, well I might have made that one up. I don't
know.
Apocalypse not--apocalyptical. That is it. I left out a
consonant.
But I appreciate all the testimony and we appreciate
Chairman George Miller, who couldn't be with us today, who
endorses the hearings and thanked us for having these hearings
and thinks it is important that we get into this issue.
We are going to look into doing some legislation. As I
said, I would appreciate each of the Members here submitting to
us how they think we can define undue hardship to make it a
level playing field on all the jurisdictions and also any other
suggestions they have got for the legislation----
Mr. Franks. Mr. Chairman, with your permission I would like
to put this statement for the record: Education Finance Council
on the record, September 23, 2009.
Mr. Cohen. Without objection.
Mr. Franks. Thank you, sir.
Mr. Cohen. So done.
So with that, I would like to thank all the witnesses for
their testimony today. Without objection Members will have 5
legislative days to submit any additional written questions,
which we will forward to the witnesses and ask that you answer
them as promptly as possible to be made part of the record.
Without objection the record will remain open for 5 legislative
days for the submission of any other additional materials.
[Whereupon, at 3:21 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
Material submitted by the Honorable Trent Franks, a Representative in
Congress from the State of Arizona, Member, Committee on the Judiciary,
and Ranking Member, Subcommittee on Commercial and Administrative Law
Answers to Post-Hearing Questions from Lauren Asher,
The Institute for College Access and Success
Answers to Post-Hearing Questions from Rafael I. Pardo,
Seattle University School of Law
Answers to Post-Hearing Questions from Brett Weiss,
Joseph, Greenwald & Laake, P.A.
Prepared Statement of the American Association of Collegiate Registrars
and Admissions Officers (AACRAO), the American Association of State
Colleges and Universities (AASCU), and the National Association for
College Admission Counseling (NACAC)
Letter to the Honorable Steve Cohen, a Representative in Congress from
the State of Tennessee, and Chairman, Subcommittee on Commercial and
Administrative Law, from Richard Williams, USPIRG Higher Education
Associate
Letter to the Honorable Steve Cohen, a Representative in Congress from
the State of Tennessee, and Chairman, Subcommittee on Commercial and
Administrative Law, from a coalition of groups in support of the issue
Submission from the Institute for College Access and Success