The Bankruptcy Lawyers Blog

• Email This
• Print
• Comments (1)
• Trackbacks

It’s the time of year when many high school seniors are deciding which college they will be attending in the fall. In 2008, this decision-making has been marked by growing concerns about student loan availability during these troubled times for the U.S. economy. 

In the midst of the credit crunch, foreclosure crisis and housing market collapse, investors are staying away from asset-based securities that are often the source of funding for student loans, thus making it more difficult to obtain student loans, especially from private lenders. 

Just yesterday, The Education Resources Institute (“TERI”) announced that it voluntarily filed for Chapter 11 bankruptcy. Unfortunately, similar developments to what happened with TERI – the oldest and largest non-profit guarantor of private education loans in the country – have been witnessed with other lenders in the past couple of months:

• On February 27^th, the Pennsylvania Higher Education Assistance Agency announced that it would suspend federal-guaranteed loans beginning in early March;

• the Missouri Higher Education Loan Authority has temporarily stopped offering private loans not guaranteed by the government;

• the College Loan Corporation recently left the federal loan program; and

• Sallie Mae—the largest student lender—recently tightened its lending standards.

So in addition to becoming more difficult to obtain, student loans may also become more expensive to pay off as lenders like Sallie Mae tighten their lending standards and demand higher returns, which will likely translate to higher interest rates on these loans.

With private lenders struggling to get financial backing, it appears that many universities are going to have to turn to federal direct programs, once again indicating that students will likely have to foot an even larger bill since private lender rebates will not be as readily available.

A recent Wall Street Journal story detailed that, despite the growing need for a solution, the Department of Education has yet to outline emergency financial aid plans for those students unable to get loans from traditional sources. Congress has since urged the DOE to come up with a “lender of last resort” plan.

So How Does All of This Affect Bankruptcy Lawyers?

As bankruptcy lawyers, we often get questions about whether student loans are dischargeable in bankruptcy.

And while we’d tell consumers that most student loans cannot be discharged through a bankruptcy case, we’d also let them know that filing bankruptcy may help with a student loan situation through several different means:

• the automatic stay will essentially freeze any action by the student loan collection agency;

• Chapter 13 bankruptcy may help consumers consolidate student loans with the rest of their outstanding bills; and

• discharges of all unsecured debts in bankruptcy cases may free up expendable income for consumers to devote to their student loan payments.

With these things considered, we shouldn’t be surprised if we get more questions from consumers about the dischargeability of student loans, especially when those loans were from private lenders that may be forced out of business in the future as a result of the economy’s struggles.

Thus we need to be prepared for a great variety of questions on student loan dischargeability.

For example, could student loans be discharged if a school closes down? Find out by checking out this resource on the Federal Student Aid website.

In anticipation of such questions, please feel free to comment on this post and send any other information on the dischargeability of student loans that you think will be helpful to both attorneys and consumers.

We’d be happy to post such information and share your insight to help consumers wondering about obtaining or discharging student loans.