In a bill that could expand bankruptcy laws, U.S. Rep. Mary Gay Scanlon (D., Pa.) is expected to introduce federal legislation Thursday that would allow student debtors hurt financially by the coronavirus to file for bankruptcy and discharge their college loans.
“Why are we providing protections to banks and servicers of student loans? Given where we’re at now, it has to change,” said Scanlon, whose district includes Delaware County and parts of South Philadelphia and Montgomery County.
“The intent [of the bill] is to create bankruptcy relief to Americans already struggling with debt who are affected during this immediate crisis.”
The bill, called the COVID-19 Student 5 Loan Relief Act of 2020, would apply to all Americans affected by the pandemic, whether they hold federal or private student loans. That makes Scanlon’s bill more fine-tuned than legislation introduced by U.S. Rep. Jerry Nadler’s Student Borrower Bankruptcy Relief Act of 2019.
Currently, about 44 million Americans carry student loan debt, totaling about $1.6 trillion. Roughly 34 million Americans have filed for unemployment.
“Would students game the system [by filing when they don’t qualify]? There’s no evidence to support that. It’s crazy that this is the case in our current economic climate, even before COVID,” said Scanlon. Current cosponsors are all Democrats, including Nadler of New York, David Cicilline of Rhode Island, Alma Adams of North Carolina, Jesús “Chuy” García of Illinois, and Juan Vargas of California. Scanlon said she hopes to get Republican House sponsors. But the bill would need more bipartisan support to pass the Republican-controlled U.S. Senate.
Today, bankruptcy laws typically don’t offer Americans any chance of debt relief for student loans.
Scanlon’s bill would amend Chapter 11 of the U.S. Bankruptcy Code to allow federal and private student loans to be dischargeable for any American whose income has been reduced during, or as a result of, the COVID-19 outbreak, or who has had a primary income earner in their family member die, or become permanently disabled, as a result of COVID-19.
The full text is available here: https://scanlon.house.gov/UploadedFiles/CSLRA_Bill.pdf.
There are income limits to prevent wealthier Americans from using the bankruptcy option: Income must have declined by at least 20%, and the prior year’s income of the debtor must have been less than $75,000; or income fell by at least 30%, and the prior year’s income totaled $75,000 to $125,000; or income dropped by at least 40%, and the prior year’s income was equal to or greater than $125,000.
Henry Sommer, a Philadelphia lawyer on the legislative committee for the National Association of Consumer Bankruptcy Attorneys, said Scanlon “has a history of being involved in consumer issues and student loans.”
Before 1978, he said, student loans were dischargeable in bankruptcy, “but over time that eroded. By 1997, Congress eliminated the discharge of government loans, unless there was undue hardship, and then in 2005 private student loans also became nondischargeable.”
The average number of households seeking personal bankruptcy in a typical year comes to about 700,000, he said. That’s down from about 1.5 million during the 2008-2009 financial crisis.
Student loan debt in Pennsylvania is among the highest per capita in the nation, averaging about $36,000 per graduate, in part because colleges here are more expensive and get less state support.
“It’s an enormous drag on the economy,” Sommer said. Those indebted include older Americans whose Social Security benefits may be garnisheed to pay off student loans.
The Scanlon bill “is a moderate remedy compared to forgiveness, for example, because under this bill, you still have to meet the requirements to file for bankruptcy,” including passing a financial means test, he said.
Even some of the nation’s largest student loan servicers, including Navient, of Wilmington, have expressed tacit support for bankruptcy reform.
“We recognize that some student borrowers face long-term financial challenges,” wrote Navient CEO Jack Remondi in 2017. “This is why, for several years, Navient has recommended bankruptcy reform that would allow federal and private student loans to be dischargeable in bankruptcy after making a good-faith effort to repay.”