[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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                       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

                              ----------                              

                           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

                              ----------                              


                     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

                              ----------                              


               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





                                 
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