07 Oct Stuck With Parent Plus Loans: The Same Discharge Problems, Only More So
One of the things I regularly tell my clients is that bankruptcy is contrary to common sense, or to our expectations of the way the world works. At its root, bankruptcy is a breach of contract, allowing one to avoid obligations that exist under contract. Bankruptcy sometimes requires creditors who have received payment to give that money back. Bankruptcy can even sometimes reverse a sale or other transfer of property. And bankruptcy treats the obligations that most of us view as most sacred–those to family members–least favorably.
There are reasons for all this, and within the larger bankruptcy scheme they each make sense (though that may not seem apparent when you are on the receiving end of some of these counter-intuitive provisions). For example, the reason debts to family members are treated less favorably is twofold–to promote equal distribution of assets to all creditors, and the recognition that most of us would make every effort to repay those debts to family in any case.
Unfortunately, the way bankruptcy treats student loan debt is also at war with our instincts and our understanding of the way the world works. Like other “student loans,” federal “Parent Plus” loans are also not dischargeable in bankruptcy, and are not eligible for income based repayment programs.
When it comes to paying the money back, the government takes a hard line. Plus loans, like all student loans, are all-but-impossible to discharge in bankruptcy. If a borrower is in default, the government can seize tax refunds and garnish wages or Social Security. What is more, repayment options are actually more limited for Parent Plus borrowers compared with other federal loans. Struggling borrowers can put their loans in deferment or forbearance, but except under certain conditions Parent Plus loans aren’t eligible for either of the two main income-based repayment programs to help borrowers with federal loans get more affordable monthly payments.
In addition to the lack of practical discharge in bankruptcy, and the lack of income-based repayment programs, the other big problem with Parent Plus loans is that no one is looking at your ability to repay the loan when the loan is made. That leaves the parents, who are naturally anxious to help their kids, on their own to assess the affordability of payments down the road. Like students who are encouraged to borrow with no thought of the earning potential of the degrees they are seeking, parents are allowed to borrow with no consideration of how those payments are to be made.
The history of student loan discharge offers some insight into the reasons it is difficult to discharge student loans, and everyone agrees that no one should be able to borrow unlimited amounts for education, and then discharge that debt just at the point that education is beginning to pay off. But that reasoning does not, and never has, explained holding parent loans to the same standards. And it is, in fact, at war with our natural instinct to see our children better situated than ourselves.
It is no secret that I am an advocate for some type of middle ground in discharging student loans in bankruptcy, as are most of my colleagues. We have serious suggestions for fair resolutions of student loan debt crisis. But the expectation that parents are, by and large, going to be able to self-police their borrowing, making good decisions about the amount they should borrow simply beggars belief. Yes, there are those who do, and who make good decisions. But there are many more who are simply not able to be objective when it comes to their children’s education, or who assume that someone else is making that calculation. After all, who expects that any lender will make a loan without giving any thought at all to your ability to pay it back? And yet, that is exactly what the Parent Plus loan program does. And frankly, you are going to have think about those practical issues if you hope to avoid the trap that the program currently poses.
It is not wonder that the extent of student loan debt may pose the next debt crisis. And Parent Plus loans are a big part of the problem. Attention must be paid to the way such loans are made, and to a fair way to discharge those loans when there is simply no way to pay.
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