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Updated May 3, 2012, 4:57 p.m. ET

Trying to Shed Student Debt
Law maker s Rethink Bankr uptcy-Law Ban on Walking Aw ay Fr om Education Loans

The gr owth of student debt is stirr ing debate about whether the gover nm ent should st ep in to ease the bur den by rewriting the bankruptcy laws—again. I n 2005, Congress prohibited student debt from being dischar ged through bankr uptcy, except in r are cases, because of concerns that many young graduates—who often have no major assets such as a house or a car—would be tempt ed to walk away from loan obligat ions. Some lawmakers now want to temper that position, pointing to concer ns that a significant number of Americans could be education loans for decades. Their efforts, however, would apply only to pr ivate loans—a fr action of the mar ket. I n the past decade student debt has surged as tuition and enr ollment climbed. At the same time, college graduates' earnings have declined. The aver age debt load of all new graduates rose 24%, adjusted for inflation, fr om 20 00 through 2010 , to $16,932, says the Pr ogr essive Policy I nstitute, a left-leaning think tank in Washington. Over the same period, the average earnings of full-time worker s ages 25 to 34 with no mor e than a bachelor's degr ee fell by 15% t o $53,539.
As the House of Representatives debates how to pay for preventing interest on college loans from doubling, publisher Mark Kantrowitz checks in on Mean Street to examine the showdown between the White House and Congress and the potential impact of higher interest rates on students. Photo: AP.

Terr i Reynolds-Rogers, a 57-year -old health-program manager fr om Palmer, Alaska, declared bankruptcy in 2007, but still has $152,000 in student debt. She said she dropped out of medical school in 1999 to car e for her two children after her husband died of brain cancer. M s. Reynolds-Roger s's lenders at one point garnished $950 a month from her wages when she fell behind in her payments. She a second job as an adjunct instr uctor at the University of Alaska and expects to work well beyond retirement age. "I t's enslaving," M s. Reynolds-Rogers says of her student debt. "At a time I should be looking at the possibility of retirement sometime in the near future, I 'm taking on another career if I 'm lucky." Stories like hers have prompted Sen. Dick Durbin (D., I ll.) to introduce legislation to make it easier for borr owers to shed debt issued by private lenders, and not backed by the government, thr ough the bankr uptcy pr ocess. The feder al government now provides the bulk of student loans.Federal loans accounted for mor e than 90% of all student borr owing in the 2010-2011 academic year , accor ding to the College Board. Nonfeder al loans—including those issued by states, banks and credit unions—accounted for 7%. The government expanded its lending after the financial crisis drove up student borr owing costs. H owever , making federal loans easier to discharge thr ough bankruptcy would be politically thorny, given that taxpayer s would pick up the tab if those debts were shed. The Obama administr ation ar gues that government lends at lower inter est r ates than pr ivate lenders and is often mor e lenient about allowing borr ower s to delay or adjust payments when they r un into financial tr ouble. H owever, since the gover nment caps how much money each student can borr ow per year , many students take out a combination of public and loans to fund their education. Consumer advocates and groups repr esenting univer sities support the bill, saying that the threat of bankruptcy would spur privat e lenders to work out better terms with bor rower s when they r un into trouble. Bankruptcy lawyer s are lobbying for the change, which would generate new business for them. But banking-industry groups, including the Amer ican Banker s Association and the Financial Ser vices Roundtable, oppose the measure, saying it would tempt students to rack up big debt that they won't repay. "The bankruptcy system would be opened to abuse," industr y groups said in a letter to the Senate Judiciar y Committee last month. Cr itics of the Dur bin measure also say lender s would r espond by charging higher int erest rates on student loans to account for the increased risk of losses. Sen. Charles Gr assley of I owa, t he top Republican on the Senate Judiciar y Committee, hasn't taken a position on the Durbin bill. "We don't want to do anything that would cause costs t o incr ease for the majority of r esponsible borr ower s who are paying off their loans," M r. Grassley said in a statement. "M any of us ar e still looking at the specifics of the Durbin measur e and whether it actually helps to address these major concerns."

SmartMoney's AnnaMaria Andriotis looks at the battle over student loans and why banks have taken steps to make sure that a proposal in Congress to forgive some loans won't work. Plus, can private student loans undercut federal rates? Photo: Getty Images.

Student-Loan Plan Passes House College Costs: Not So Cheap '529 Plans' Feel the Heat Earlier: Student Debt Sparks a Fight

Channing Johnson for The W all Street Journal

Tracy Paulsen, a 34-year-old lawyer from Wenham, Mass., delayed payment on much of her $200,000 debt, while interest accrues. When she starts making payments in a year, she doesn't know how she will manage.

The bankr uptcy debate comes as student debt has emerged as a campaign issue, with both Pr esident Barack Obama and likely Republican presidential nominee M itt Romney calling this week on Congress to extend a fr eeze in the 3.4% inter est r ate on one of the gover nment's most popular student-loan programs. I f lawm akers don't act, the r ate will double to 6.8% for such loans made star ting July 1. Administration officials estimate the change would affect roughly 7.4 million students who are pr ojected to take out federally subsidized loans in the year beginning July 1. The H ouse on Friday passed a Republican plan to extend the freeze on interest rat es, but the White H ouse thr eatened to veto the bill because it would cover the $6 billion cost of the subsidy by eliminating a prevention and public-health fund created by M r. Obama's 2010 health-care law. Senate Democr ats plan to vote next mont h on legislation to hold rat es steady but fund it by ending a tax pr ovision benefiting some small-business owner s. Also on Friday, M r . Obama promised to cr ack down on what he said ar e deceptive and aggressive tactics by some for -profit colleges that prey on soldier s returning fr om war with misleading information and high-pressur e tactics. I n fr ont of troops during a visit to For t Stewart, Ga., M r . Obama signed an executive or der r equir ing new disclosures and stiffening r ules for both for-profit and not-for-pr ofit colleges.The Whit e H ouse said the moves will curb abuses by schools t hat harass vulnerable member s of t he service until t hey sign up for programs that they sometimes can't affor d and may not deliver what they pr omise.

Senate Democratic aides said alt ernatives to M r . Dur bin's bankruptcy bill are being considered. A Durbin spokeswoman said the senator was looking for a way to attach the bill to a br oader measure that would pass later this year . M any college gr aduates are struggling keep up with their debt payments. About 27% per cent of bor rowers who have begun r epaying their student loans are defined as delinquent, having at least one past-due student-loan account, accor ding to the Federal Reserve Bank of New Yor k. As people defer or fall behind on their payments, the total amount they owe grows as interest accr ues. Tracy Paulsen, a 34-year-old lawyer fr om Wenham, M ass., said she recently moved in with her aunt, has put off mar riage talk with her long-term boyfriend and depleted her individual r etir ement account—all so she can get a handle on more than $20 0,000 in student loans outstanding, most of which paid for law school. "I t's a noose around my neck that I see no way out of," she said. M s. Paulsen has used an option to delay payment on much of her debt while the interest accrues, which has caused the total amount owed t o balloon by tens of thousands of dollars. She has to star t making payments within a year , and doesn't know how she will do it.

—Laura Meckler, Jared A. Favole and Siobhan Hughes contributed to this article. W r i te to Josh M itchell at Cor r ecti on s & Am pli fi cati on s An executive order signed by President Bar ack Obama on Apr il 27 requires new disclosures and stiffens rules for both for -profit and not-for-profit colleges. An ear lier ver sion of this article incorr ectly said the order applied only to for-profit colleges. A ver sion of this ar ticle appear ed Apr il 28, 2012, on page A3 in some U.S. editions of The Wall Str eet Jour nal, w it h the headline: Tr ying to Shed Student Debt.

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