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Federal Reserve Chairman Says it Makes No Sense to Restrict Student Loan Debt in Bankruptcy

By on March 2, 2018

I will admit I was surprised to hear the Federal Reserve Chairman Jerome Powell provide testimony that student loan debt should not be protected in bankruptcy.

As part of Powell’s testimony to the Senate Committee on Banking, Housing, and Urban Affairs on March 1, 2018, he expressed concern student loan debt is a drag on the economy.

The Washington Examiner stated “Powell cautioned that it’s important that students be able to borrow to finance their educations, but said they might not understand the risks that come with student loans. He also questioned the difficulty in getting student loans discharged in bankruptcy.

“I think alone among all kinds of debt, we don’t allow student loan debt to be discharged in bankruptcy,” he said. “I’d be at a loss to explain why that should be the case.”

Senator Schatz from Hawaii raised the specific issue of the drag on the economy from student loan debt. Chairman Powel stated borrowing for college was important but expressed concern borrowers do not understand the “risk they are taking and possible payoffs.”

It’s hard to lay all the blame on the student and a clear understanding of risks and payoffs is an issue that should be the responsibility of borrowers, schools, and lenders.

Powell said, “You do start to see longer term negative effects on people who can’t pay off their student loans and it hurts their credit rating and it impacts the entire path of their economic life.”

Despite the concerns raised by the Federal Reserve Chairman and economic policy experts about student loan debt, Congress refuses to take action to change bankruptcy laws and the Department of Education has engaged in policies that appear to help for-profit schools and lead to more harm to borrowers struggling under economy slowing debt.

Call me cynical but it seems government actions are being driven by forces other than from sound economic policy when it comes to altering the damaging path of unmanageable student loan debt.

About Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

One Comment

  1. Richard Precht

    March 2, 2018 at 1:50 pm

    Steve, The recent RFI from DOE asking for input about the congressional mandate to “except” student loans fro bankruptcy discharge except in cases of undue hardship SCARES ME!

    If you read it closely the DOE states it this way:”seeks to ensure (the exception) is ‘appropriately’ implemented’….” and it goes on to add: “is requesting public comment on ‘factors to be considered’ in evaluating undue hardship…. (and whether) “potentially additional considerations should weigh into whether an undue hardship claim should be conceded by the loan holder”.

    One could interpret this to mean that the DOE is regretting it’s publicing that July 7, 2015 Policy Directive in which the DOE sought to limit the predatory actions of ECMC and other aggressive lenders from running up huge court costs and legal fees to “fight undue hardship” cases being filed by underemployed, disabled, and aged debtors owing student loans with no means to even pay the ever increasing and accruing interest.

    Could it be the DOE wants to revert back to a time when they were in bed with the lenders and their voracious legal teams who drove some debtors to the point of suicide? For any reading this comment you need to make your views known while the DOE window of opportunity for input remains open. You can post your input on what you think needs to be done in regards to the current bankruptcy law – which in nearly every case, denies including student loan debts from being discharge in a chapter 7 or 13 filing.

    Please go here and send the Dept. of Ed. your input and your feelings about this travesty!

    Use the “Comment Here” to write out your comments on this and do it today, the deadline is May 22, 2018 before midnight. Thank you!
    Richard A Precht

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