Even after bankruptcy, student debt is still owed

By JUSTIN POPE Published: April 26, 2012
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The misfortunes that brought schoolteachers Devin and Sarah Stang and their four young children to bankruptcy — and the loss of their house and a car in the process — were their own unique story.

They bought the house at just the wrong time. There were heavy medical expenses when, at five months pregnant, she delivered stillborn twins. And their money woes go back further: When Sarah's college softball team pressured her to drop classes she wanted to take, she quit, lost her scholarship and had to make up the difference with loans. Devin, too, borrowed to get a master's degree. Then they struggled amid school layoffs.

Now, the Stangs just want a truly clean slate, financially. But even the ordeal of bankruptcy won't give it to them, and the reason is a common one: Much of their debt comes from private student loans.

Virtually any other kind of debt — including medical bills, mortgage, credit cards and car loans, even gambling losses— can be discharged in bankruptcy, allowing the “honest but unlucky” a chance to restore their footing through an arduous restructuring overseen by a court.

But under a 2005 law passed by Congress to protect lenders, private student loans fall under the same nearly impossible-to-clear category as child support payments and criminal fines.

“It's a huge part of why the younger generations are here now,” said the Stangs' bankruptcy lawyer, Matthew Barrett.

To advocates for student borrowers, the law is infuriating, counter-productive and — if intended to ensure lenders would be willing to make loans — demonstrably unnecessary. They see changing it as among the most effective, and least costly, ways to help those most seriously burdened by student debt.



Also ...

GOP's aid adds cuts

Speaker John Boehner says the House will vote Friday on a Republican bill preventing interest rates on federal student loans from doubling this summer. But the legislation will be paid for by cutting money from President Barack Obama's health care overhaul law.

With both parties competing for election-year support from students, Obama has been pressuring Congress to pass legislation keeping the current 3.4 percent interest rates on subsidized Stafford loans from doubling on July 1. Senate Democrats have introduced a bill that would do so, and would cover the $5.9 billion price tag by raising payroll taxes on the upscale owners of some privately owned corporations. Boehner is trying to turn the tables by paying for the measure in a way Republicans prefer.

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