BILL ANALYSIS �
AJR 11
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Date of Hearing: May 6, 2013
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Roger Dickinson, Chair
AJR 11 (Wieckowski) - As Amended: April 15, 2013
SUBJECT : Bankruptcy
SUMMARY : Urges the President and Congress of the United States
to support and pass legislation that would allow the discharge
of private student loan debt in bankruptcy. Specifically, this
bill :
1)Provides for the following findings:
a) Existing federal law exempts from discharge in a
bankruptcy case filed under Chapter 7 or Chapter 13 of the
Bankruptcy Code specified educational loans made, or
secured, by a lender other than the federal government,
also known as private student loans, unless the debtor
convinces a bankruptcy court that repayment would be an
undue hardship on the debtor and the debtor's dependents, a
sometimes difficult and expensive process not required to
discharge other unsecured nonpriority debt; and,
b) Californians should have the same ability to discharge
their private student loan debt as they do to discharge
their unsecured nonpriority debt; and,
c) Californians who are not given relief from their burden
of private student loan debt, even after a successful
completion of a bankruptcy case, are seriously hindered
from establishing personal economic stability and
contributing to the economic growth of the state; and,
d) United States Senator Dick Durban and Representative
Steve Cohen have recently introduced the following
legislation in their respective congressional houses that
would permit private student loan debt to be discharged in
bankruptcy and are substantially similar to legislation
they each introduced in 2010 and 2011:
i) The Fairness for Struggling Students Act of 2013,
supported by eight cosponsors at the time of this
resolution.
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ii) The Private Student Loan Bankruptcy Fairness Act of
2013, supported by 24 cosponsors at the time of this
resolution; and
e) The inability of Californians to more easily discharge
private student loan debt prevents them from gaining the
"fresh start" that a successful bankruptcy case is intended
to provide
EXISTING FEDERAL LAW prohibits the discharge of private student
loan debt in bankruptcy. (11 U.S.C. � 523(a) (8)(b)).
FISCAL EFFECT : None
COMMENTS :
According to the author this resolution is necessary for the
following reasons:
Student loan debt is growing at an alarming rate in the
United States. At over $1 trillion, it has surpassed
personal credit card debt.
Private loans now comprise about 24% of the nation's total
education loan volume. These private student loans
generally have higher interest rates and stricter repayment
options than federal loans. Outstanding private student
loan debt exceeded $150 billion in 2012, held by more than
2.9 million borrowers. More than $8 billion of this debt is
in default, according to the Consumer Financial Protection
Bureau.
The inability to discharge private student loan debt
through bankruptcy the same way that other private debt is
discharged causes debtors to postpone life-cycle events
such as buying a home, getting married, or starting a
family. The ability to discharge private student loan
debt would release debtors that are unable to pay from
their financial obligation.
Not only does the inability to discharge private loan debt
affect the individual debtor, it negatively impacts the
United States and California economy?
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Dischargeability of private student loan debt may also
induce private student loan lenders to improve their
interest rates and repayment plans to prevent student loan
borrowers from going bankrupt and discharging their private
student loan debt.
Student Loan Debt by the Numbers.
1)Of the 20 million who attend college each year, close to 12
million - or 60% - borrow annually to help cover costs.
(Source: Chronicle of Higher Education ).
2)There are approximately 37 million student loan borrowers with
outstanding student loans today. (Source: Federal Reserve
Board of New York ).
3)As of the first Quarter of 2012, the under 30 age group has
the most borrowers at 14 million, followed by 10.6 million for
the 30-39 group, 5.7 million in the 40-49 category, 4.6
million in the 50-59 age group and the over 60 category with
the least number of borrowers at 2.2 million for an overall
total of 37.1 million. (Source: FRBNY ).
4)There is roughly somewhere between $902 billion and $1
trillion in total outstanding student loan debt in the United
States today. The Federal Reserve Bank of New York reports
$902B while the Consumer Finance Protection Bureau reports
$1T .
5)Roughly $864 billion is outstanding federal student loan debt
while the remaining $150 billion is in private student loans
(Source: Consumer Finance Protection Bureau ). Private student
loans are not made or backed by the federal government.
6)As of Quarter 1 in 2012, the average student loan balance for
all age groups is $24,301. About one-quarter of borrowers owe
more than $28,000; 10% of borrowers owe more than $54,000; 3%
owe more than $100,000; and less than 1%, or 167,000 people,
owe more than $200,000. (Source: FRBNY ).
7)Among all bachelor's degree recipients, median debt was about
$7,960 at public four-year institutions, $17,040 at private
not-for-profit four-year institutions, and $31,190 at
for-profit institutions. (Source: College Board ).
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8)As of October 2012, the average amount of student loan debt
for the Class of 2011 was $26,600, a 5% increase from
approximately $25,350 in 2010. (Source: The Project on Student
Debt ).
9)The majority of borrowers still paying back their loans are in
their 30s or older.
10)Of the 37 million Americans with outstanding student loan
debt: Almost 40% of these borrowers are under the age of 30.
Nearly 42% are between the ages of 30 and 50. 17% are older
than 50.
11)Borrowers age 30-39 carry $307 billion in student loans,
followed by those under 30 at $292 billion, $154 billion in
the 40-49 age group, 50-59 at $106 billion and the over 60
category carrying $43 billion, for a total outstanding debt of
$902 billion.
(Source: FRBNY ).
12)Of the 37 million borrowers who have outstanding student loan
balances, 14%, or about 5.4 million borrowers, have at least
one past due student loan account. Of the $870B-$1T in
outstanding student loan debt, approximately $85 billion is
past due.
(Source: FRBNY ).
13)The official FY 2010 two-year national student loan cohort
default rate rose to 9.1%, up from 8.8% in FY 2009, while the
three-year rate declined slightly from 13.8% to 13.4%.
(Source: U.S. Department of Education ).
14)Only about 37% of federal student loan borrowers between 2004
and 2009 managed to make timely payments without postponing
payments or becoming delinquent.
15)For every student loan borrower who defaults, at least two
more borrowers become delinquent without default. Two out of
five student loan borrowers - or 41%- are delinquent at some
point in the first five years after entering repayment.
(Source: Institute for Higher Education Policy ).
16)As of 2012, there are now more than $8 billion in defaulted
private student loans, or 850,000 distinct loans in default.
(Source: CFPB ).
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17)As of early 2012, borrowers in their 30s have a delinquency
rate (more than 90 days past due) of about 6%, while borrowers
in their 40s have a delinquency rate double that, at about
12%.
18)Borrowers in their 50s have a delinquency rate of 9.4% and
those over 60 have a delinquency rate of 9.5%. (Source:
Federal Reserve Bank of New York Consumer Credit Panel ).
19)From 2004 to 2009, 33% of undergraduate federal student loan
borrowers who left without a credential became delinquent
without defaulting and 26 % defaulted, vs. 21% with a
credential who became delinquent without defaulting and 16%
who defaulted.(Source: IHEP ).
20)From 2004-09, a third or less of federal student loan
borrowers at four-year, public or private nonprofit
institutions became delinquent or defaulted on their loans,
while nearly half or more (45% and 53%, respectively) of their
borrowers were making timely payments on their loans.)
One-quarter to one-third of borrowers at for-profit and public
two-year institutions were making timely payments on their
loans, and more than half of all borrowers in these sectors
were delinquent or had already defaulted.
(Source: IHEP ).
Expanding market .
The yearly growth of private loans has outpaced federal loans.
In 2005-06, federal loan volume equaled nearly $69 billion while
private loan volume was a little over $16 billion. The
Institute for Higher Education predicts that federal Stafford
loan volume will grow by 8% while private loans will grow by
25%. In terms of recent (December 31, 2011) offerings, the CFPB
reported low-end variable rates of 2.98% to 3.55% and high end
rates (those paid by those with the worst credits) of 9.50% to
19.00%, with an average rate of 7.8%. These are initial rates in
a very low rate environment and could increase substantially if
interest rates rise generally. Fixed-rate risk-based pricing
ranges from 3.4% to 13.99%. The financial institution private
loan market grew rapidly over the last decade and just as
rapidly receded. According to the College Board, the financial
institution market grew from less than $5 billion in 2001 to
over $20 billion in 2008, and then rapidly contracted to less
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than $6 billion in 2011. A large portion of student loan volume
during the boom was funded by asset-backed securities (ABS). In
this respect, the private student loan market resembled the
subprime mortgage market. During the boom, high investor demand
for student loan ABS which allowed student loan ABS issuers to
create structures with very low collateralization ratios. As a
result of these factors, $100 in student loans could generate
immediate cash proceeds from securitization of $105 or more.
Generally speaking, the buyer assumed all of the risk that the
borrower would fail to repay the loan after such a transaction.
Therefore, a PSL lender had an incentive to increase loan
volumes made for such a sale, with less incentive to assure the
creditworthiness of those loans.
As developments in the asset backed securities market in mid to
late 2007 negatively impacted investor demand for student loan
ABS, private loan originations slowed dramatically.
During the lending boom, private loan lenders sought to increase
volume through a new
marketing channel and processing protocol: Direct-to-Consumer
(DTC). DTC lending circumvented the school's financial aid
office, marketing instead through mass media, online
advertising, and direct media. Funds were generally disbursed
directly to the student, instead of to the school. The school
did not certify the borrower's financial need, and the lender
instead imposed a cap of the lesser of total cost of attendance
or a fixed amount, such as $30,000. This new technique could
simultaneously increase the number of borrowers and the amount
each one borrowed. It also created an opportunity for the
student to borrow more than the actual costs of education.
Borrower challenges .
The private student loan market is structured in the same way as
the mortgage market, where loans are held by investors and
serviced by intermediaries, often other financial institutions.
Not surprising the challenges faced by student loan borrowers
often reflect the issue faced by mortgage borrowers. CFPB has
highlighted the following borrower issues:
1)Inability to speak with personnel empowered to negotiate a
repayment plan.
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2)Inability to refinance.
3)Inability to access repayment plans previously advertised.
4)"Good faith" partial payments leading to default.
5)Bankruptcy -triggered defaults.
6)Unexpected checking account transactions.
7)Handling of payments.
8)Confusion when loans and servicing rights are bought and sold.
9)Crediting of overpayments.
10)Limited access to account information.
11)Loss of benefits due to servicer personnel-suggested action.
12)Debt collection practices.
Student loans and bankruptcy.
Student loans are among the few types of debts that generally
are not dischargeable in bankruptcy. In contrast to student
loans, most other debts are dischargeable in either a Chapter 7
liquidation process or Chapter 13 debt adjustment plan. Other
debts singled out as nondischargeable include child support,
alimony, court restitution orders, criminal fines and some
taxes.
Prior to 1976, all student loan debt was dischargeable in
bankruptcy. That year, Congress added an exception to the
bankruptcy discharge by prohibiting the discharge of education
loans made by the government or a non-profit college or
university, unless those loans had been in repayment for five
years. That exception was continued in the 1978 Bankruptcy Act,
but debtors who completed a chapter 13 plan, paying all they
could afford over three to five years, were not subject to the
five year waiting period. Since 1978, there have been three
significant legislative changes in the treatment of student
loans in bankruptcy.
In 1990, the five year repayment period was extended to seven
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years and the differential treatment of chapter 13 was
eliminated. In 1998, the temporal ground (the seven years) for
discharge was eliminated. And finally, in 2005, Congress
included most private student loans in the nondischargeability
category as part of a comprehensive rewrite of the bankruptcy
code.
The only exception to the nondischargeability of student loan
debt is if the debtor can persuade the bankruptcy court that
repayment of the loan would result in "undue hardship." There is
no statutory definition of "undue hardship." This is a
court-defined term, usually satisfied only if the debtor can
meet the three-pronged test set forth in Brunner v. New York
State Higher Education Services Corp. under which the debtor
must demonstrate: (1) they cannot maintain a minimal standard of
living for themself or their dependents if forced to repay the
loan, (2) circumstances exist indicating this state of affairs
is likely to persist for a significant portion of the repayment
period, and (3) the debtor has made a good faith effort to repay
the loan. In certain courts, a somewhat more flexible "totality
of the circumstances" test has been applied.
These statutory changes to the bankruptcy discharge for student
loans were made despite the lack of any hard evidence that there
were abuses of the system. In fact, in 1977, after the original
bankruptcy amendments had been adopted but before they went into
effect, the House Judiciary
Committee issued a report concluding that the
nondischargeability provision should be repealed.
The House Judiciary Committee found that there was no real
problem and that fewer than 1% of all federally insured and
guaranteed educational loans were discharged in bankruptcy. An
unidentified lawmaker slipped in a provision making private
student loans non-dischargable. There is no evidence that this
policy change was discussed or otherwise analyzed.
A study in the American Bankruptcy Law Journal , An Empirical
Assessment of Student Loan Discharges and the Undue Hardship
Standard, by Jason Iuliano analyzed the result of bankruptcy
cases and the interaction of the hardship standards in Brunner.
That study concluded:
For years, commentators have derided the undue hardship
requirement as too burdensome and attacked courts for
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applying the standard in an inconsistent manner. The real
problem, it turns out, is that debtors simply are not
pursuing student loan discharges. So few discharges are
granted, not because judges set the bar too high, but
rather, because so few people request relief. This study
showed that only 0.1 % of student loan debtors in
bankruptcy file an adversary proceeding in an attempt to
discharge their educational debts. This statistic is
surprising for three main reasons. First, many debtors who
do not try to discharge their loans are in dire financial
positions. Second, courts grant discharges to nearly forty
% of discharge seekers. Third, many debtors are successful
without the aid of an attorney.
This study also showed that courts are not granting relief
in an indiscriminate manner. People who received discharges
differed from people who were denied discharges in three
respects: successful debtors (1) were more likely to have a
medical hardship, (2) were less likely to be employed, and
(3) had lower annual incomes the year before they filed
bankruptcy. Rather than condemn the undue hardship
requirement, members of the bankruptcy community should
encourage debtors with legitimate need to file adversary
proceedings even if they cannot hire an attorney. Courts
are willing to grant discharges. The problem is that few
people are asking for them.
Staff notes that in spite of the evidence that student loan debt
does get discharged in bankruptcy in some cases, the standards
that the debtor must meet in order to receive discharge of
student loan are far more onerous that the standards for other
types of debt. Instead student loan debt is held on par with
other debts that cannot be discharged, such as taxes and tax
liens, alimony and child support, debts obtained through fraud,
false pretenses or false representation, debts for fraud while
you were acting in a fiduciary capacity, or for embezzlement or
larceny, debts for willful and malicious injury, debts for fines
or penalties to governmental units, debts for judgments in
wrongful death or personal injury lawsuits resulting from motor
vehicle, vessel or aircraft accidents while you were intoxicated
and condominium or cooperative association fees or assessments.
Furthermore, the fact that a debtor lacks knowledge about their
rights during bankruptcy that could otherwise change the outcome
of their cases should not prevent placing student loan debt on
the same level as other types of debt that is discharged.
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Technical amendments.
1)Page 1, line 3, strike "excepts" and insert "exempts"
2)Page 2, line 7, Strike "their."
3)Page 2, lines 15-16 strike, "supported by eight cosponsors at
the time of this resolution."
4)Page 2, line 18, strike, "supported by 24 cosponsors at the
time of this resolution;"
REGISTERED SUPPORT / OPPOSITION :
Support
California Council on Economic Education (CCEE)
California State Student Association (CSSA)
Children's Advocacy Institute at the University of San Diego
School of Law
Opposition
None on file.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081