Student-Loan Straitjacket

October 1, 2013
Wall Street Journal 
student loan news

Consumers burdened debt may file for bankruptcy to get a fresh start, but often they will find themselves owing even more on their student loans at the end of the process. Federal bankruptcy code rarely allows borrowers to wipe out student loan debt. Chapter 13 also generally restricts these borrowers from making full payments on student loans during the three to five years in the bankruptcy period, during which time lenders can add penalties such as interest and late fees to the student-loan balances.

These rules have been criticized by some federal lawmakers, attorneys, and consumer advocates for making a difficult situation even worse. Some experts say the U.S. Bankruptcy Code is unable to address student-loan debt, which has reached $1 trillion and bypassed credit cards as the largest source of consumer debt, excluding mortgages. For example, 38-year-old Pennsylvania resident Daisy Ellerbee has two years of payments left on her Chapter 13 bankruptcy plan but currently owes more than $30,000 on a loan that originally was $24,700, co-signed for one year of her daughter's education. Sen. Richard Durbin (D-Ill.) has led proposed student-loan debt-forgiveness legislation, saying that bankruptcy-repayment plans that increase student-loan balances are "driving borrowers further into debt and denying people the fresh start that bankruptcy promises."

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