Bankruptcy and Student Loans

The government is in the process of allowing college grads to file bankruptcy for student loans for those individuals who make an attempt over a 5-7 year period to pay back the loans.  However, it only applies to private loans.

It turns out that companies such as Sallie Mae are not necessarily opposed to student loan bankruptcy.  How is that, you say?  Simple business sense.  It has to make sense for their business.  So, here’s how it works.

Currently Sallie Mae earns interest plus principle on portfolios, since they are federally guaranteed.  If a borrower is delinquent, but later makes payments, Sallie Mae makes a little extra on the late payments.  So that’s, interest plus principle plus late fees.  However, over the course of a year, before the borrower is officially transferred over to the government for delinquency, Sallie Mae has to contact the borrower several times.  Contacting borrowers means “servicing costs”.  If, on the other hand, the accounts were paid on time, Sallie Mae would “trade late fees for delinquent costs”, which, in the long run, is more profitable.

While we wait on a final decision on student loan bankruptcy, it is important to look at the things we do have control over, and the things that can be filed for bankruptcy. 

Keep in mind that in a 1934 decision, the Supreme Court had the following to say about bankruptcy:  “[It] gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.”

Bankruptcy is for the “honest but unfortunate debtor,” and under Chapter 7, Chapter 11, & Chapter 13 codes, bankruptcy can be filed for several reasons, including:  credit card debt, property, and business-related debt.  Under Chapter 13, individuals also have the option for repayment over 3-5 year installment plans. 

The author, Ben W. Koyl, is an attorney located in Chicago, IL. He is the principal of the Law Office of Ben W. Koyl, P.C. with offices located in the Chicago Loop, Beverly Woods / Blue Island, and Joliet, IL. The firm's website is http://www.chicagobklaw.com.