Proposed legislation allows students to declare bankruptcy

While proposed legislation would provide loan forgiveness for students who have no way out, it could also cause credit problems, Boston University professors said.

“The advantage of defaulting on your loans is you’re out of debt — you don’t owe the money any longer and you don’t have to make payments,” said economics professor Kevin Lang. “The disadvantage is the effect that prior default can have in a variety of situations where people check your credit history.”

Sen. Dick Durbin of Illinois, Sen. Sheldon Whitehouse of Rhode Island and Sen. Jack Reed of Rhode Island unveiled legislation Wednesday that would effectively reverse a 2005 decision making it impossible for students to default on their loans.

“Young Americans are being hamstrung by record debt levels, forcing them to delay other important investments in their futures, including purchasing homes and saving for a secure retirement,” Durbin said in a Wednesday press release on his senatorial website.

Student loans are by far the largest source of consumer debt, accounting for $1 trillion of the total figure, according to Durbin’s release.

Lang said while there are serious downsides to defaulting on loans, it could not be disadvantageous for students to simply have the option.

“You can have a catastrophic financial situation through no fault of your own,” Lang said. “And that’s what bankruptcy was designed for.”

One who defaults on their loans has to work his or her way through the legal system and might also be denied other types of loans down the road due to the previous default, Lang said.

Mark Kantrowitz, financial aid expert and FinAid.org publisher, said the legislation would force lenders to provide more options to students looking to take out loans.

“Right now the legislators don’t have much pressure on them to compromise with borrowers because they know they have this loan forever,” Kantrowitz said. “The borrower isn’t able to discharge debt.”

Due to a split Congress, the legislation is unlikely to achieve immediate approval, Kantrowitz said.

“I can only see the pressure on Congress to do something about bankruptcy discharge growing as more and more students take on greater amounts of debt to pay for their college education,” he said. “More of the burden is shifting onto students and that manifests itself in a couple ways — one of which is increased debt in graduation and another is shifting enrollment from higher cost colleges to lower cost colleges.”

Kantrowitz said it is ultimately up to students to make sure the legislation is pushed through, as young voters have been largely important in the past two presidential elections and will be crucial in upcoming congressional elections.

While BU and financial aid officials said the legislation might be advantageous for some, a number of BU students said its negative aspects outweighed its positive features.

“It would benefit me greatly but it would adversely affect my credit score as well, which is then bad for future home ownership or loans for cars, etc. later in life,” said Travis Lovell, a first-year Sargent College of Health and Rehabilitation Sciences graduate student.

Lovell said he has student loans but would never consider declaring bankruptcy to avoid paying them off.

“We should have to pay it back,” he said. “It’s going to be a huge burden on the government, and considering we are already in quite a bit of debt this is just going to be adding to it.”

Amelia Stucker, a College of Engineering junior, said the cost of college may be a contributing factor to the growing amount of national student loan debt, but should not be an excuse for defaulting on loans.

“The price of college has gone up a lot and it’s definitely difficult for some students to pay for it, but there are other options out there,” she said. “You should struggle through that without being able to take the easy route out.”

While all students deserve the chance to get an education, the judicial system should be wary when allowing students to default on their student loans, said College of Communication sophomore Allie Gillette.

“It’s a little bit unfair for people that do have to pay full tuition and can’t get financial aid for whatever reason,” Gillette said. “They [those in the judicial system] have to be careful of not giving it to too many people and make sure it’s carefully studied and what not.”