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AN UNDUE HARDSHIP? DISCHARGING 

EDUCATIONAL DEBT IN BANKRUPTCY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

COMMERCIAL AND ADMINISTRATIVE LAW 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

SEPTEMBER 23, 2009 

Serial No. 111–58 

Printed for the use of the Committee on the Judiciary 

( 

Available via the World Wide Web: http://judiciary.house.gov 

(II) 

COMMITTEE ON THE JUDICIARY 

JOHN CONYERS, JR., Michigan, Chairman 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

PEDRO PIERLUISI, Puerto Rico 

MIKE QUIGLEY, Illinois 

LUIS V. GUTIERREZ, Illinois 

BRAD SHERMAN, California 

TAMMY BALDWIN, Wisconsin 

CHARLES A. GONZALEZ, Texas 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

LINDA T. SA ́ NCHEZ, California 

DEBBIE WASSERMAN SCHULTZ, Florida 

DANIEL MAFFEI, New York 

LAMAR SMITH, Texas 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

DANIEL E. LUNGREN, California 

DARRELL E. ISSA, California 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TOM ROONEY, Florida 

GREGG HARPER, Mississippi 

PERRY APELBAUM, Majority Staff Director and Chief Counsel 

SEAN MCLAUGHLIN, Minority Chief of Staff and General Counsel 

SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

STEVE COHEN, Tennessee, Chairman 

WILLIAM D. DELAHUNT, Massachusetts 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

DANIEL MAFFEI, New York 

ZOE LOFGREN, California 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

JOHN CONYERS, JR., Michigan 

TRENT FRANKS, Arizona 

JIM JORDAN, Ohio 

HOWARD COBLE, North Carolina 

DARRELL E. ISSA, California 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

MICHONE JOHNSON, Chief Counsel 

DANIEL FLORES, Minority Counsel 

(III) 

C O N T E N T S 

SEPTEMBER 23, 2009 

Page 

OPENING STATEMENTS 

The Honorable Steve Cohen, a Representative in Congress from the State 

of Tennessee, and Chairman, Subcommittee on Commercial and Administrative Law ........................................................................................................... 1 

The Honorable Trent Franks, a Representative in Congress from the State 

of Arizona, and Ranking Member, Subcommittee on Commercial and Administrative Law .................................................................................................. 3 

The Honorable John Conyers, Jr., a Representative in Congress from the 

State of Michigan, Chairman, Committee on the Judiciary, and Member, 

Subcommittee on Commercial and Administrative Law .................................. 4 

WITNESSES 

The Honorable Danny K. Davis, a Representative in Congress from the State 

of Illinois 

Oral Testimony ..................................................................................................... 8 

Prepared Statement ............................................................................................. 10 

Ms. Lauren Asher, The Institute for College Access and Success 

Oral Testimony ..................................................................................................... 14 

Prepared Statement ............................................................................................. 16 

Mr. Rafael I. Pardo, Seattle University School of Law 

Oral Testimony ..................................................................................................... 27 

Prepared Statement ............................................................................................. 30 

Mr. J. Douglas Cuthbertson, Miles & Stockbridge, P.C. 

Oral Testimony ..................................................................................................... 45 

Prepared Statement ............................................................................................. 47 

Mr. Brett Weiss, Joseph, Greenwald & Laake, P.A. 

Oral Testimony ..................................................................................................... 55 

Prepared Statement ............................................................................................. 57 

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Prepared Statement of the Honorable John Conyers, Jr., a Representative 

in Congress from the State of Michigan, Chairman, Committee on the 

Judiciary, and Member, Subcommittee on Commercial and Administrative 

Law ........................................................................................................................ 5 

Prepared Statement of the Honorable Henry C. ‘‘Hank’’ Johnson, Jr., a Representative in Congress from the State of Georgia, and Member, Subcommittee on Commercial and Administrative Law ......................................... 7 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Material submitted by the Honorable Trent Franks, a Representative in 

Congress from the State of Arizona, Member, Committee on the Judiciary, 

and Ranking Member, Subcommittee on Commercial and Administrative 

Law ........................................................................................................................ 79 

Answers to Post-Hearing Questions from Lauren Asher, The Institute for 

College Access and Success ................................................................................. 81 

Page

IV 

Answers to Post-Hearing Questions from Rafael I. Pardo, Seattle University 

School of Law ........................................................................................................ 85 

Answers to Post-Hearing Questions from Brett Weiss, Joseph, Greenwald 

& Laake, P.A. ....................................................................................................... 90 

Prepared Statement of the American Association of Collegiate Registrars 

and Admissions Officers (AACRAO), the American Association of State 

Colleges and Universities (AASCU), and the National Association for College Admission Counseling (NACAC) ................................................................. 91 

Letter to the Honorable Steve Cohen, a Representative in Congress from 

the State of Tennessee, and Chairman, Subcommittee on Commercial and 

Administrative Law, from Richard Williams, USPIRG Higher Education 

Associate ............................................................................................................... 95 

Letter to the Honorable Steve Cohen, a Representative in Congress from 

the State of Tennessee, and Chairman, Subcommittee on Commercial and 

Administrative Law, from a coalition of groups in support of the issue ......... 97 

Submission from the Institute for College Access and Success ........................... 98 

(1) 

AN UNDUE HARDSHIP? DISCHARGING 

EDUCATIONAL DEBT IN BANKRUPTCY 

WEDNESDAY, SEPTEMBER 23, 2009 

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON COMMERCIAL

AND ADMINISTRATIVE LAW, COMMITTEE ON THE JUDICIARY, Washington, DC. 

The Subcommittee met, pursuant to notice, at 1:10 p.m., in room 

2141, Rayburn House Office Building, the Honorable Steve Cohen 

(Chairman of the Subcommittee) presiding. 

Present: Representatives Cohen, Conyers, Watt, Franks, Coble, 

and King. 

Staff present: (Majority) James Park, Counsel; Andre ́s Jimenez, 

Professional Staff Member; (Minority) Zach Somers, Counsel; and 

Jennifer Lackey, Staff Assistant. 

Mr. COHEN. This hearing of the Committee on the Judiciary, 

Subcommittee on Commercial and Administrative Law will now 

come to order. Without objection, the Chair will be authorized to 

declare a recess of this hearing. I will now recognize myself for a 

short statement. 

Today we examine the conditional dischargeability of student 

loan debt in bankruptcy with a particular emphasis on the discharge of private, non-federally guaranteed or subsidized student 

loans. Congress has not held a hearing on the student loan 

dischargeability provision of the Bankruptcy Code since its first enactment in 1976, which was an amendment to the Higher Education Act, nor have they considered the 2005 extension of this provision to private student loans in particular. 

In light of the rising cost of obtaining higher education, and particularly in light of the increase in the relativity—relatively unregulated private student loan market, such an examination is long 

overdue. We both see these higher costs of higher education and 

people having more difficulty securing second jobs and whatever 

necessary to help them through college, and then a difficulty getting jobs once they are out to use their education. 

Unlike other kinds of unsecured debt, the Bankruptcy Code conditions the discharge of student loan debt on a debtor showing that 

he or she will suffer an undue hardship if forced to repay the loan. 

Congress’ rationale, if there is such a thing, for giving student loan 

creditors favorable treatment in bankruptcy was to protect the viability of the Federal student loan program and more generally, 

public monies. 

2 

Four years ago, Congress went beyond Federal money protection 

and extended this type of favorable, unusual treatment to a private 

student loan, without any rationale expressed or claimed, no empirical evidence supporting such an extension. It is understandable 

why we want to have some level of support for our own loan program, but for those less favorably offered private, there was no particular reason except that BAPCPA, in 2005, kind of took in a—the 

entire sink of what people desired to have in the law, and that is 

what happened. 

Access to education has been one of the defining issues of my legislative career, which has lasted now through 3 decades. As a Tennessee senator I fought 18 years to establish the Tennessee Lottery, which provides Hope Scholarships, as in Georgia, to young 

people who meet certain criteria and gives them scholarships—over 

$1.5 billion thus far since the program was initiated in 2004. 

These scholarships have done a lot for students in Tennessee, but 

they need other monies as well to make it through college, and the 

scholarships we have in Tennessee—the Hope Scholarships—help 

folks make it who otherwise might not be able to afford it, and 

there is a merit portion and a need-based portion. 

Given this history of championing access to higher education of 

students of modest means, I view with concern the great increase 

in the number of private student loans issued over the last decade. 

Ostensibly, these types of loans, which are not Federal guaranteed 

or subsidized, could provide greater access to a college education 

for those who may not qualify for Federal loans or who would otherwise not be able to afford college education. However, recent 

studies suggest that the access that private student loans could 

provide may bring costs that outweigh their benefits. 

Private student loan borrowers often find themselves trapped 

under the weight of tens of thousands of dollars in expensive, highinterest hefty student loan debt with no guaranteed opportunity for 

income-based repayment, deferment, or forbearance. It was these 

types of loans that caused me to condition Tennessee’s lottery program on repaying college debt, for I have seen too many people in 

my private practice who had high debt and were—and had one foot 

in bankruptcy while struggling to get their debt paid off, which 

would never have come to an end. 

Unlike Federal student loans, private loans lack consumer protections and any hope of having a job later, leaving financially distressed borrowers with little option but to seek bankruptcy relief. 

Some commentators have suggested that such bankruptcy relief 

may be too difficult to obtain, or at least that obtaining discharge 

may be haphazard. Professor Rafael Pardo, one of our witnesses 

today, has conducted empirical studies suggesting that similarly 

situated student loan debtors may receive different outcomes with 

respect to their attempts to discharge student loan debt. 

Non-legal factors, such as the experience level of the debtor’s attorney or the identity of the judge often determine the outcome of 

the discharge request, raising questions about whether the undue 

hardship standard is really a workable one. 

Kind of reminds me of Barry Scheck yesterday. 

I thank our witnesses for being here today, and I look forward 

to their testimony and maybe seeing why these student loans are 

3 

put in a special category otherwise reserved for things like fraud, 

child support, alimony, and primary home mortgages. 

I now recognize my colleague, Mr. Franks, the distinguished 

Ranking Member of the Subcommittee, who has offered to forego 

this hearing but his offer was not accepted—— 

Mr. FRANKS. Well, thank you, Mr. Chairman. Mr. Chairman, last 

week on a largely party-line vote, the House in full session passed 

H.R. 3221, the Student Aid and Fiscal Responsibility Act. The fiscal responsibility confuses me, but be that as it may. 

This legislation is a dramatic shift away from private studentlent board consolidation of Federal power over higher education financing. In fact, today we—in fact, according to the Time magazine, the Administration’s proposal to restructure the student loan 

industry is, according to them, much closer to an actual government takeover than its health care reform plan. 

The passage of H.R. 3221 in the House makes today’s hearing, 

in my judgment, especially troubling. If H.R. 3221 isn’t the death 

knell of private student lending, ending the favorable treatment 

that private student loans receive under the Bankruptcy Code certainly could be. 

Since 1976 Congress has gradually increased the protections that 

Federal nonprofit and for-profit student lenders receive under the 

Bankruptcy Code. Some would like to see these bankruptcy protections erased, especially with regard to privately-issued student 

loans. 

However, Mr. Chairman, privately-issued student loans increase 

access to education by providing a source of funding to those that 

need to borrow more than the Federal student loan limits allow. 

Additionally, private-issued student loans allow lenders to tap into 

billions of dollars in private capital. Now if private capital, maybe 

we should toss in here just the definition: Private capital is that 

capital that the Federal Government doesn’t have to borrow from 

abroad to fund our Nation’s educational system. 

Critics of the special bankruptcy protection student loans receive—that student loans receive point to the high costs of higher 

education that lead many students to incur substantial debt as 

they try to put themselves through school, and I understand that, 

but college affordability and the cost of student loans are issues 

Congress should indeed try to address, but allowing student loans 

to be unconditionally dischargeable in bankruptcy is not a solution 

to those problems. 

If we make student loans unconditionally dischargeable we will 

encourage abuse, increase the interest rates students pay on their 

loans, and dry up the flow of capital into the student lending market. This will either decrease access to higher education or create 

a vacuum the Federal Government will have to fill again at taxpayer expense. 

Now, I suspect, of course, that the push to make privately-issued 

student loans unconditionally dischargeable is part of a broader effort to replace all privately-issued student loans with government 

loans. But Mr. Chairman, just as we do not need a single-payer 

health care system, we do not need a single-lender higher education system. 

4 

There is no reason to crowd private lenders out of the student 

loan market, either directly through legislation like H.R. 3221 or 

indirectly through changing the bankruptcy rules that apply to student loans. Yes, Mr. Chairman, the government should regulate 

private student loans to eliminate any abusive lender practices, but 

the real culprit here is the rapidly rising cost of higher education, 

which has been escalating way beyond the general rate of inflation. 

Making private sector loans dischargeable in bankruptcy will do 

nothing to solve college affordability problems. And ultimately, Mr. 

Chairman, I would like to say sometimes that your future generations are watching. Because I truly believe that in the long run, 

when we as government come in and try to think that somehow our 

power can repeal the laws of mathematics and make private lenders just suddenly do the same thing that they have always been 

doing, even though there is greater risk to them, it just doesn’t 

happen that way. 

I know it is a good theory, but someone said that there is nothing 

more tragic in this world than a beautiful theory that is totally destroyed by an unruly set of facts. And unfortunately, the effect of 

both this legislation that we have discussed and this bankruptcy 

concept that we are discussing will be to drive capital away from 

the ability to help finance education, and I believe that that will 

hurt students in the long run. 

And unfortunately, Congress doesn’t have the power to do anything to repeal that mathematical equation except to inject taxpayer dollars into the equation, and sooner or later there will be 

a day of reckoning. I submit that it is probably already here and 

we don’t know it. 

With that, I look forward to the witness’ testimony and yield 

back the balance of my time. Thank you, Mr. Chairman. 

Mr. COHEN. Thank you. 

I thank the gentleman for his statement and for looking forward 

to the witness’ testimony. I now recognize Mr. Conyers, the distinguished Member of the Subcommittee, for his opening statement 

and the Chairman of the Committee on the Judiciary. 

Do you have an opening statement or would you like to waive? 

Mr. CONYERS. Well, I will partially waive it, Mr. Chairman. 

Just to greet Danny Davis and to commend him for the great 

work that he has done in the course of his career. I mean, it is not 

anybody that can get President Bush to sign a bill we thought he 

didn’t like, and there we were in the White House up there with 

President George W. Bush just like it was the normal way we do 

business around here. 

So I commend him for his tenacity. I knew Danny Davis when 

he wasn’t a congressman, and I think that this idea is very important. 

And the reason I only need a minute is that I have started thinking about what is so different about discharging student loans that 

is different from discharging everything else that is dischargeable? 

I mean, this isn’t a gambling debt; this isn’t something that is 

against the common good or against the general welfare. 

Credit cards are dischargeable. I don’t hear anybody ranting 

about that. You rant about it too. You rant, ‘‘Okay, well that is 

good.’’ Consistency is the hot button of great minds. 

5 

And what about mortgages being discharged in bankruptcy? Your 

yacht is dischargeable in bankruptcy. Your vacation resort place is 

dischargeable in bankruptcy. Your second or third home are all dischargeable in bankruptcy. 

Then you get to, what are these people doing trying to get an 

education and run into trouble and they go to the bankruptcy 

judge? Well, no. The door is closed. After all, in 1976 we said, 

‘‘Enough of this government-funded guaranteed student loans being 

made dischargeable. We are changing that.’’ 

Well, my colleagues weren’t even here in 1976, so I can’t even 

blame them for it. Matter of fact, they could blame me for it. I was 

here. 

So I think Congressman Davis asking us to take another look at 

this is a good idea, and I will put my statement in the record. 

[The prepared statement of Mr. Conyers follows:] 

PREPARED STATEMENT OF THE HONORABLE JOHN CONYERS, JR., A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF MICHIGAN, CHAIRMAN, COMMITTEE ON THE JUDICIARY, AND MEMBER, SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

Obtaining higher education is the key to economic security and a better future. 

For our youth, it may present the only way out of a life of poverty. 

And for many middle class Americans facing unemployment, returning to school 

to be retrained for a new profession may be their best way to getting back into gainful employment. 

Unfortunately, changes made to our bankruptcy laws have made getting a higher 

education more difficult, in ways that may not have been understood. 

Let me explain. As originally conceived, our Nation’s bankruptcy system was intended to offer a financial fresh start to honest, hardworking Americans. 

It helped encourage people to reach for goals like obtaining a higher education, 

while giving them some assurance that, should fate pull the rug out from under 

them, their debts will not be permanently devastating, that they will still have a 

fair chance at the American Dream. 

Encouraging people to reach for their goals benefits our entire society. 

But, Congress has passed a series of amendments over the years that have had 

the effect of substantially weakening the scope and value of that fresh start. And 

that is particularly true with regard to debts incurred for education. 

Beginning in 1976, certain types of government-funded and government-guaranteed student loans were made nondischargeable in bankruptcy, with various exceptions. 

In the ensuing years, Congress passed amendments that gradually limited the exceptions, so that increasingly more types of government student loans became nondischargeable. 

With the enactment of the mis-named Bankruptcy Abuse Prevention and Consumer Protection Act in 2005, an entirely new category of educational loans were 

made nondischargeable, placing the financial fresh start even further out of reach. 

As a result of this amendment, certain privately funded student loans can no 

longer be discharged in bankruptcy. 

As I recall, this particular amendment was never the subject of any formal Congressional hearing. 

Thus today, four years later, we finally consider for the first time whether this 

latest move was a mistake, and whether we should make it a bit easier to discharge 

private student loans in bankruptcy. 

With respect to the perils of private student loans, however, we have, in a broad 

sense, heard this story before. 

I fear that, as with the lending industry’s aggressive marketing of subprime mortgages—which drove increases in home purchases for much of the last decade, only 

to result in the onset of the home foreclosure crisis—the long-term costs of using 

private student loans, both for the borrower and perhaps for our Nation’s economy, 

may simply be too high. 

While not a perfect analogy, I see at least three possible similarities between private student loans and subprime mortgages that give me pause. 

6 

First, both private student loans and subprime mortgages are subject to high interest rates and fees, leaving many borrowers with unaffordable debt that may ultimately push them into bankruptcy. 

Private student loans—like subprime mortgages and unlike federal student 

loans—typically have variable interest rates. 

I’m told that some of these initial rates can be as high as 19%, and that some 

lenders have no maximum limit on the interest rates they charge students. 

Borrowers, as a result, are completely subject to the whim of their lenders. 

As with subprime mortgages, many student loan borrowers are young persons 

with little or no credit history or sometimes with less than stellar credit histories, 

which makes it easier for lenders to charge them the worst interest rates. 

Mark Kantrowitz of Finaid.org observed that 75% of student loan borrowers receive the worst interest rates, while only 10% receive the best. 

Similarly, there are no limits on the amount or types of fees that a private lender 

can charge, adding to the cost of private student loans. 

Second, both private student loan borrowers and mortgage borrowers find that 

they are having difficulty in their interactions with lenders and servicers. 

As in the mortgage industry, the private student loan servicer is usually the one 

who interacts with the borrower, although the servicer is very often a step removed 

from the loan lender. 

Just like mortgages, private student loans are usually repackaged and sold to investors, who then have yet another financial interest in the loan. 

As with mortgagors, student loan borrowers complain of improper billing procedures and fees, and a lack of responsiveness to requests for information or assistance by troubled borrowers. 

Private student loan lenders, like many mortgage lenders, have demonstrated an 

unwillingness to provide flexibility in modifying loan terms, such as allowing for income-based repayment, or providing even partial forgiveness for distressed borrowers. Third, some private student loan lenders, like some mortgage lenders, may be engaging in what could be characterized as ‘‘reverse redlining.’’ In effect, these lenders 

steer low-income and minority borrowers into higher interest rate loans. 

Such predatory lending raises the prospect that student loan borrowers will bear 

the brunt of a new loan default crisis similar to the home mortgage foreclosure crisis. 

Two weeks ago, this Subcommittee held a hearing on the role of the lending industry in the home foreclosure crisis. One of the witnesses, Baltimore City Solicitor 

Suzanne Sangree, told us about her city’s lawsuit against Wells Fargo, the Nation’s 

largest mortgage lender. 

The lawsuit alleged that Wells Fargo deliberately steered African-American borrowers towards high-cost subprime mortgages regardless of whether the borrower 

qualified for better loan terms. 

The result has been that home foreclosures have disproportionately hit predominantly African-American neighborhoods very hard. 

A similar kind of allegation has been leveled against the Nation’s largest private 

student loan lender, Sallie Mae. Two Florida student loan borrowers allege that Sallie Mae charged higher interest rates for minority borrowers, even though they may 

have qualified for lower rate loans. 

Student loan lenders admit that the borrower’s school is a factor in determining 

interest rates for a student loan. Lenders charge higher interest rates for schools 

with high default rates. 

Unfortunately, schools with a large proportion of minority students tend to have 

higher default rates than schools generally. 

The result, therefore, may be that lenders are effectively taking into account impermissible criteria like race in setting unfavorable interest rates and other terms 

for minority borrowers. 

How should we respond to these concerns? In contrast to a home mortgage, student loan debt is unsecured debt. Generally, unsecured debt can be discharged in 

bankruptcy. 

However, the Bankruptcy Code currently conditions the discharge of student loan 

debt on the debtor showing that she would suffer an undue hardship if she had to 

repay her student loans. 

So one possible response to concerns about private student loans is to reform the 

Bankruptcy Code to make it easier to discharge private student loan debt. 

Last year, I voted for an amendment to the Higher Education Opportunity Act 

introduced by Representative Danny Davis, which would have made a very modest 

amendment to the Bankruptcy Code with respect to the dischargeability of privately-funded student loans. 

7 

Essentially, debtors would have been able to discharge those student loan debts 

where they had been in repayment for more than five years. This amendment would 

have provided some relief for debtors overwhelmed by high-cost private student 

loans. 

While I was disappointed that the amendment was not adopted, I am hopeful that 

testimony from today’s hearing will demonstrate why that change is necessary. 

I thank Chairman Cohen for holding this hearing today on the topic of discharging private student loans in bankruptcy. I also thank our witnesses, and look 

forward to their testimony. 

Mr. COHEN. Thank you, Mr. Chairman. I appreciate your statement and don’t hold you responsible for the other 434 people in 

1976. 

Without objection other Members’ opening statements will be included in the record. I would like to thank all the witnesses for 

participating in today’s hearing, and without objection your written 

statements will be placed in the record. 

[The prepared statement of Mr. Johnson follows:] 

PREPARED STATEMENT OF THE HONORABLE HENRY C. ‘‘HANK’’ JOHNSON, JR., A REP- RESENTATIVE IN CONGRESS FROM THE STATE OF GEORGIA, AND MEMBER, SUB- COMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

Thank you, Mr. Chairman, for holding this very important hearing on the Bankruptcy Code’s conditional discharge provision for student loan debt, specifically the 

issue of discharging private student loans in bankruptcy. It is imperative that we 

examine the issue of discharging private student loans in bankruptcy, particularly 

in light of the record breaking unemployment numbers that we have seen in this 

economy. This is the same economy that is causing everyday Americans to go bankrupt in order to meet basic needs. One of these needs, repaying student debt is particularly contentious. 

Student loans are unsecured debt and unsecured debt is typically dischargeable 

in bankruptcy. However, the Bankruptcy Code has a specific carve out that does not 

exempt student loans unless a debtor is able to demonstrate that continued repayment of the debt would impose an ‘‘undue hardship’’ on the debtor. In essence, this 

means that current bankruptcy law treats students who face legitimate financial 

distress the same severe way as people who are trying to discharge child support 

debts, alimony, overdue taxes and criminal fines. We are not discussing tax evaders 

or absent fathers. We are talking about unfairly penalizing adults who twenty years 

ago, as naı ́ve and financially unsophisticated 17 year olds, agreed to the dense and 

confusing terms of a private loan agreement in order to get an education and contribute to our society. And unlike with federal loans, these individuals are often unable to work out terms that ensure a reasonable and fair repayment schedule. 

The witnesses’ testimony today will make clear that questionable practices have 

been used in providing private educational loans. As the witnesses will state today, 

private loans are aggressively marketed to students simply seeking education. It 

would be absurd for us to pretend that every teenager in this position can reasonably be expected to comprehend what they are agreeing to. Even if they do understand, I question whether two thirds of these students know that they were eligible 

for additional federal loans. These federal loans contain mechanisms to ensure repayment without excessive financial distress on the part of the borrower. I also 

question whether these students are aware of the egregious racial disparities that 

exist in lending. For example, my colleague from Illinois, Congressman Davis will 

attest to how lending terms can be based on characteristics independent of one’s financial viability. 

In short, we have a responsibility to ensure that lenders are ethical in issuing 

these loans, and are only able to do so after adequately informing the debtor of what 

they are agreeing to. We ensure repayment by holding private lending companies 

accountable: we must require the same repayment and distress options as federal 

loans, if we provide the same protections as federal loans. Such guidelines permit 

education lenders to reap a larger percentage of the original principal and guarantees Americans access to education when they need this support the most. 

Thank you, Mr. Chairman, for scheduling this hearing. I look forward to hearing 

from the witnesses and I yield back the balance of my time. 

8 

Mr. COHEN. And before we go into all that I would like to introduce our first panel, which is a singular panel. Congressman 

Danny Davis, who has been introduced already to some extent by 

the Chairman, and in a way beyond what I could do to recognize 

him. He represents the 7th congressional district of Illinois. 

Currently, Representative Davis serves on Committee on Ways 

and Means and the Committee on Oversight and Government Reform. He is a member of the Congressional Black Caucus, co-chairman of the Community Health Center’s Caucus, co-chairman of the 

Congressional Sugar Caucus, and the Progressive Caucus, and a 

man I am fortunate to serve with and know as congressman. And 

I look forward to the day that I know him as something else. 

Thank you, Mr. Davis. You may begin your testimony. 

TESTIMONY OF THE HONORABLE DANNY K. DAVIS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS 

Mr. DAVIS. Thank you very much, Chairman Cohen, Ranking 

Member Franks, Chairman Conyers, Mr. Watt, Mr. Coble, all the 

Members of the Committee. I thank you for holding this hearing 

to examine the hardships associated with the inability to discharge 

one’s private educational debt via bankruptcy 

As a co-chair of the Community Reinvestment Taskforce within 

the Congressional Black Caucus, I thank you for the opportunity 

to voice the concerns of the taskforce members about the hardships 

associated with the non-dischargeability of these debts and the 

likely disproportionate effect of this policy on African Americans. 

Two studies released in August raised concerns for the members of 

CBC’s Community Reinvestment Taskforce with regard to the 

bankruptcy protection afforded to private educational debt. 

A study by the Project on Student Debt found a dramatic increase in the use of private student loans and that African American students were statistically more likely than other students to 

borrow such loans, with the percentage of African American private 

loan borrowers quadrupling from 4 percent to 17 percent in the last 

4 years. In addition, an analysis by Moody’s Investment Service 

found that private loans made directly to students tend to have 

higher default rates. 

Together, these reports indicate that tens of thousands of students, and especially African American students, are relying on private, non-Federal educational loans that lack basic consumer protections and that receive statutory protection from bankruptcy except under extreme circumstances, making these borrowers much 

more likely to experience financial hardship associated with private 

educational debt. 

In addition to these studies, I have many personal stories from 

borrowers who bettered themselves via education only to experience tremendous economic hardship associated with their private 

student loans, including Mandy, from Illinois, and Laurie, from 

Ohio. Shockingly, one lender’s representative jokingly suggested 

that Laurie and her husband could sell their kidneys to help pay 

off the loan. 

The hardships associated with these debts and our bankruptcy 

policies are neither funny nor simply business. They are significant 

burdens to our citizens. Our concerns over the privilege afforded to 

9 

private education lenders are heightened by data last week showing that racial disparities in lending exist even for high-income borrowers earning over $100,000. 

As policymakers, we want to ensure that our statutes do not unintentionally burden particular groups of people. Private education 

debt is no different than any other consumer debt. It involves private profits and deserves no privileged treatment. The members of 

the Community Reinvestment Taskforce are concerned that current 

bankruptcy law penalizes borrowers for pursuing higher education, 

provides no incentive to private lenders to lend responsibly, and 

possible affects African American borrowers more negatively than 

borrowers from other racial and ethnic groups. 

And so, Mr. Chairman, again I want to thank you and Members 

of the Committee for the opportunity to be here to share these concerns and to testify before the Committee. I thank you very much 

and yield back the balance of my time. 

[The prepared statement of Mr. Davis follows:] 

10 

PREPARED STATEMENT OF THE HONORABLE DANNY K. DAVIS, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF ILLINOIS


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Mr. COHEN. I want to thank Congressman Davis for his testimony and for his amendment he offered last year that I was happy 

to support, glad to support. Are there any questions from any 

Members of the panel for Congressman Davis? 

Mr. FRANKS. Could I just thank Congressman Davis for being 

here? Notwithstanding in my earlier comments, I certainly laud 

your commitment to trying to do things that are motivated from 


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the right point of view, and I thank you very much for being here, 

sir. 

Mr. DAVIS. And I thank you very much, Mr. Franks, for your 

comment. 

Mr. COHEN. Thank you, sir. I appreciate your bringing this issue 

to my attention last year with your timely amendment that was 

unfortunately not successful and your continued persistence. I appreciate your opening statement. 

It looks like you are making some headway with my distinguished and great-mind Ranking Member, and so I think we will 

be working with the staff to try to bring some legislation. Hopefully 

it could be bipartisan, and if not, you know, we will just have to 

try to forge ahead and do what is right. 

And with that, we thank you and you are dismissed, relieved, 

and allowed to vote, which we will soon join you. 

We have got a vote in 15 minutes. I don’t know if it is worth trying to start the second panel. We have got a second panel. We 

could try at least one witness—— 

The second panel, come on up. We will get started. 

All right. Thirteen minutes for votes, so maybe we can get 

through at least one witness, maybe two, and we appreciate your 

being here. 

I thank all the witnesses who are participating in today’s hearing. Without objection your written statement will be placed in the 

record and we would like to ask you to limit your oral remarks to 

5 minutes. 

You have got a lighting system in front of you. You have got a 

button to push to turn your microphone on; light comes on green, 

that means you are between 5 and 1 minute; you are into your 

speech at 5 minutes and you have got at least more than 1 minute 

left, your yellow light means you are in the last minute, and red 

means you are supposed to finish and allow us to move on. After 

you present your testimony Subcommittee Members will be permitted to ask questions, again, the 5-minute rule. 

And our first witness today will be Lauren Asher. Lauren Asher 

is a nationally recognized expert on student loans and financial aid 

with a very pleasant smile. 

Ms. Asher is president of the Institute for College Access and 

Success, an independent, nonprofit organization working to make 

higher education more affordable and available for people of all 

backgrounds. The institute is home to the Project on Student Debt, 

which Ms. Asher helped found in 2005. 

After serving in senior positions to the Kaiser Family Foundation 

National Partnership for Women and Families and U.S. Department of Labor, she founded and ran Asher Policy Consulting from 

2002 to 2005. Her clients included foundations, national, state, and 

local nonprofits working to improve the lives of children, youth, 

and working families. 

With such a background you are like Betty Crocker, I guess. 

Thank you for being here, Ms. Asher, and you may begin your testimony. 

Mr. COHEN. Punch your button. 

14 

TESTIMONY OF LAUREN ASHER, THE INSTITUTE FOR 

COLLEGE ACCESS AND SUCCESS 

Ms. ASHER. Can you hear me? 

Mr. COHEN. We can hear you, and your green light is on which 

means you are running. 

Ms. ASHER. Thank you. 

Thank you, Chairman Conyers, Chairman Cohen, Ranking Member Franks, and all the other Members of the Subcommittee. I will 

skip my introduction since you have done it for me. 

Post-secondary education is increasingly essential to both the future of our Nation and to individual Americans who seek to enter 

or remain in the middle class. However, as college costs have outpaced family incomes and available aid, more Americans have had 

to borrow for their education than ever before. 

Two-thirds of all students who graduate from 4-year colleges now 

have student loan debt. Most have Federal student loans, but a 

growing number have private student loans as well or instead. Last 

year, one-third of all bachelor’s degree recipients used a private 

student loan at some point before they graduated. 

Private student loans are one of the riskiest ways to pay for college. They are expensive, mostly variable-rate loans that cost more 

for those who can least afford them. Private loans do not have the 

fixed rates, consumer protections, or flexible repayment options of 

Federal loans, they are not guaranteed by the Federal Government, 

are not part of the Federal student loan program, and are not financial aid any more than using a credit card to pay for tuition or 

books is financial aid. 

Mr. COHEN. Don’t worry about the alarm. Go ahead. 

Ms. ASHER. Yet, despite how similar private loans are to credit 

cards and other consumer debt, since 2005 they have been treated 

very differently in bankruptcy. The 2005 bankruptcy reforms also 

made it significantly more difficult for anyone to declare bankruptcy while changing the treatment of private student loans as 

well. Today credit cards and other forms of consumer debt, even 

gambling debt, are dischargeable in bankruptcy, but private loans 

are non-dischargeable, along with Federal student loans, back 

taxes, child support, and criminal fines. 

Borrowers who have already met the stringent test for bankruptcy must initiate a separate legal proceeding to prove to a judge 

that repaying their private student loans would create an undue 

hardship. As other witnesses will testify today, without a highpriced attorney this is virtually impossible to do, and even then the 

outcomes depend more on arbitrary factors, like the judge before 

you, than the merits of your case. 

There are reasonable arguments for making Federal student 

loans at least somewhat harder to discharge in bankruptcy, although not necessarily as hard as criminal fines. For example, Federal loans are backed by taxpayer dollars. They offer some significant relief in situations of economic hardship, unemployment, 

death, disability, as well as payment plans like income-based repayment that can help borrowers meet their obligations and avoid 

default and bankruptcy. 

15 

Private student loans have none of these benefits and are commercial products. There is simply no justification for putting them 

in the same category as Federal loans in bankruptcy. 

Giving the private student loan industry privileged treatment in 

bankruptcy is particularly inappropriate. Its predatory practices 

have targeted young people who have no financial experience with 

deceptive marketing, high-pressure sales tactics, and kickbacks to 

colleges for steering students to these high-priced loans. 

Until Congress passed legislation last year, there were virtually 

no regulations to limit the dangers of private student loans. Prospective borrowers were not even entitled to information about the 

actual loan terms and costs before they had to sign the promissory 

note. Even today, private loans remain largely unregulated and the 

new congressionally-mandated disclosure requirements don’t go 

into effect until next year. 

Students and families should be able to count on their college financial aid offices for impartial advice about loans and lenders, 

and most can. However, over the past few years Federal, state, and 

independent investigations have exposed numerous conflicts of interest. College officials received gifts, trips, stock options, and other 

benefits from lenders. Some colleges agreed to recommend a lender 

for kickbacks on the loan proceeds. 

In other cases, lenders staffed call centers and financial aid offices posing as college representatives while giving very biased advice about student loans. Legislation passed in 2008 was aimed at 

curbing such abuses but did nothing to help the unsuspecting student already saddled with these costly loans. 

Shielding private loans from bankruptcy means that 

unaffordable repayment demands can extend literally forever, even 

after death. It may also make lenders less cautious about making 

loans to people who cannot afford them, such as low-income students at schools with low completion rates and job placement rates. 

From 2006 to 2008, Sallie Mae increased its ‘‘nontraditional’’ 

subprime lending to students by 42 percent. As default rates soared 

and the financial market collapsed in 2008 Sallie Mae stopped 

making these loans, but thousands of American students were 

stuck with this high-cost debt. 

In a particularly disturbing development recently revealed in an 

A.P. story, some large, for-profit colleges have started making their 

own private loans directly to the same high-risk students. For example, Corinthian Colleges plans to make $130 million of such 

loans this year alone, made $120 million last year, while telling investors that it expects nearly 60 percent—that is six-oh percent— 

of borrowers to default. 

Ironically, private lenders remain fully eligible for the bankruptcy protection that their borrowers are now denied. The Education Resources Institute, Education Finance Partners, and My 

Rich Uncle all recently declared bankruptcy. They were able to 

make a fresh start regardless of why they failed. Their borrowers 

deserve the same fair treatment in bankruptcy. 

Thank you for inviting me to testify today, and I welcome your 

questions. 

[The prepared statement of Ms. Asher follows:] 

16 

PREPARED STATEMENT OF LAUREN ASHER


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Mr. COHEN. Thank you, Ms. Asher. We appreciate your testimony. 

I now have the august power, which I announced at the beginning, to declare a recess of this hearing at any time I please. And 


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if you noticed, my two colleagues urged me to start the panel. They 

have left. I need now to vote. 

The hearing is recessed. 

[Recess.] 

Mr. COHEN. With the august power that I have we are now back 

in session. Mr. Conyers, I think, will be here in a second and Mr. 

Franks will be maybe back hopefully soon; he has another hearing. 

So we thank Ms. Asher for her testimony, and now we will recognize Mr. Rafael Pardo, who is a tenured member of the faculty at 

Seattle University School of Law—which does not have a football 

team—and where he went to in July of 2006. Prior to that he was 

an associate professor of Tulane Law School, 2003 to 2006, routinely teaches courses in bankruptcy and commercial law. 

Most of his research is focused on the discharge of student loans 

in bankruptcy and he has been published in the American Bankruptcy Law Journal, the Florida State University Law Review, and 

the University of Cincinnati Law Review. Before entering academia, he worked as an associate in the Business Reorganization 

and Restructuring Group of Willkie Farr & Gallagher in New York. 

With that, we welcome Professor Pardo, and you may begin your 

testimony. 

TESTIMONY OF RAFAEL I. PARDO, 

SEATTLE UNIVERSITY SCHOOL OF LAW 

Mr. PARDO. Chairman Cohen, Ranking Member Franks, Chairman Conyers, and other Members of the Subcommittee, it is my 

great privilege and honor to testify today on the discharge of student loans in bankruptcy. Much of my academic research studies 

this process, and with each study I have conducted I have become 

increasingly convinced that the process is horribly broken and in 

desperate need of reform. 

I want to begin today by providing some historical perspective on 

the treatment of educational debt in bankruptcy. That perspective 

underscores that we have reached the point where we are today as 

a result of interest group-driven legislation rather than sound policy choices. 

Currently, a debtor may discharge student loans in bankruptcy 

only upon establishing that repaying such loans would impose an 

undue hardship, but this has not always been the case. Prior to 

1977, student loans were automatically discharged in bankruptcy. 

Perceived abuse of the bankruptcy system, as opposed to any real 

abuse, drove Congress to change this state of affairs. A 1976 GAO 

report had found that less than 1 percent of all federally insured 

and guaranteed educational loans were discharged in bankruptcy. 

In other words, no abuse. 

What did exist at the time were isolated instances of bankruptcy 

filings by recent graduates on the eve of lucrative careers. These 

stories were sensationalized by student loan industry advocates 

and used to prompt Congress into legislating against alleged widespread abuse that did not exist. Simply put, a few bad apples 

spoiled the barrel rotten for everyone. 

Over the past 3 decades, Congress has repeatedly curtailed the 

bankruptcy relief available to student loan debtors. In every instance that it has done so, there has never been, to my knowledge, 

28 

any empirical evidence presented to demonstrate either real 

threats to the fiscal solvency of student loan programs or abuse of 

the bankruptcy system by student loan debtors. 

The most recent change occurred with the 2005 amendments to 

the Bankruptcy Code. By virtue of that legislation, for-profit student loan lenders have been extended the special treatment that 

had been reserved, up to that point in time, for governmental and 

nonprofit student loan lenders. 

This change did not meet with any objections from lawmakers, 

even from the House Members who expressed dissenting views to 

accompany the House Judiciary Committee’s report on the 2005 

amendments. This episode strikes me as one of the most emblematic instances of the student loan lobby’s excessive influence on the 

design of the Bankruptcy Code’s student loan discharge provision. 

The upshot of the historical record is that the plight of bankruptcy debtors who seek a discharge of their student loans has become worse, and this has occurred without legitimate justification. 

I am, therefore, greatly encouraged that the Subcommittee is reexamining whether to undo the special treatment that exists in bankruptcy for private student loan lenders. 

In the written testimony I have submitted to the Subcommittee, 

I make four major points. First, empirical evidence suggests that 

student loan debtors suffer from severe financial distress, more so 

than debtors in the general bankruptcy population. 

In one of my studies, I found that the median debtor who sought 

a discharge of student loans was 42 years old and would have had 

to devote 2 years and 9 months of household income to fully repay 

those loans—assuming, during this period of time, that the debtor’s 

household could live expense-free and that the educational debt 

would not balloon by virtue of interest, fees, and the like. This is 

a crushing debt burden, plain and simple. 

Second, the undue hardship standard for discharging educational 

debt is currently undefined by the Bankruptcy Code. As such, the 

standard provides minimal guidance to litigants and judges. My 

studies have shown that this produces differential treatment of 

similarly situated debtors, with some granted a discharge and others denied a discharge. 

Third, one of my studies demonstrates that legally-irrelevant factors, such as the level of experience of the debtor’s attorney and the 

identity of the judge assigned to the debtor’s case, seemingly affect 

whether a debtor obtains a discharge of his or her student loans. 

This raises important access to justice concerns. 

Fourth, private student loans are largely unregulated. Borrowers 

of such loans often find themselves deeply mired in debt with limited options for repayment relief. When Congress removed the 

automatically dischargeable status of private student loans in 

bankruptcy it stripped away the social safety net available to borrowers of such loans. In the absence of robust non-bankruptcy relief from private student loans, the negative effects of litigating 

claims of undue hardship will fall disproportionately on debtors 

with such loans. 

In terms of solutions, I respectfully urge Congress to restrike the 

balance between student loan debtors and lenders of private student loans by making such loans once again automatically disVerDate Aug 31 2005 11:26 Mar 09, 2010 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6601 H:\WORK\COMM\092309\52412.000 HJUD1 PsN: 52412
29 

chargeable in bankruptcy. I would also urge Congress to clarify the 

undue hardship standard. 

The simple solution would be to create a statutory presumption 

of undue hardship when a debtor does not have enough disposable 

income to make his or her student loan payments. An analogous 

presumption already exists as part of the process for approving reaffirmation agreements in bankruptcy. Writing a similar presumption into the Bankruptcy Code’s undue hardship discharge provision would strike a more appropriate balance in a litigation process 

that unjustifiably favors student loan creditors, who undoubtedly 

have more resources than their debtor adversaries and who have 

more familiarity with the bankruptcy system as repeat players. 

These proposed solutions are important first steps to restoring 

consistency in our higher education finance system, which currently has a public-oriented approach to student loan origination 

but a business-oriented approach to student loan collection. 

This concludes my testimony. Thank you again for providing me 

the opportunity to testify before you today. I look forward to answering your questions. 

[The prepared statement of Mr. Pardo follows:] 

30 

PREPARED STATEMENT OF RAFAEL I. PARDO


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Mr. COHEN. Thank you, Professor Pardo. Appreciate your testimony. 

Our third witness is Doug Cuthbertson. Mr. Cuthbertson is a 

member of Miles & Stockbridge, a commercial business litigation 

practice in northern Virginia. He practices commercial law and contracts, consumer financial services, business torts, intellectual 

property, and bankruptcy litigation, real estate, and creditors 

rights. 

He has represented secured and unsecured creditors in adversary 

proceedings and contested matters in bankruptcy cases. He also 

represents financial institutions and consumer financial services 

litigation in the Federal system. 

Thank you for being here with us today, Mr. Cuthbertson, and 

we are going to recognize you for your testimony. 

TESTIMONY OF J. DOUGLAS CUTHBERTSON, 

MILES & STOCKBRIDGE, P.C. 

Mr. CUTHBERTSON. Thank you, Chairman Cohen, and Chairman 

Conyers, Ranking Member Franks, other Members of the Subcommittee, thank you for inviting me to testify before you today. 

I have been asked to appear to testify as to the effectiveness of the 

undue hardship discharge provision as it currently exists in the 

Bankruptcy Code. My testimony is that of an attorney. I am not 

here representing a client or my firm. 

The exception to the discharge for educational loans was enacted 

in 1976, and the reason that it was enacted was in response to a 

flood of student loan bankruptcies in which debtors were filing for 

bankruptcy based almost solely on student loan debt. The nondischargeability provision had two goals: to maintain the financial 

integrity of the student loan system, and to curb abuses by recent 

graduates who have their whole earning lives—earning capacity— 

ahead of them. 

One reason that the exception to discharge is particularly important for educational lenders in both the Federal and the private 

system is the underwriting criteria that the lenders use. Historically, private educational lenders have only regarded a student’s 

future capacity to repay. 

That is in stark contrast to other types of commercial and business loans that are made in the private sector, where debtors will 

generally regard a host of factors, including current ability to 

repay, credit history, future ability to repay, the value of any collateral securing the loan. None of those considerations are present in 

educational loans. 

The congressional purposes of maintaining the financial integrity 

of the student loan system as well as curbing abuses of the system 

apply equally to Federal loans as well as to private loans, and the 

Congress implicitly recognized this in the 2005 BAPCPA amendments, when it amended Section 523(a)(8) to include qualified educational loans. That includes most private loans, so Congress has 

treated them both the same. 

And it is important to recognize, I think, that private loans supplement the Federal loans. They are meant to be a supplement to 

cover the college—the rise in college costs, and they are rapidly. 

46 

And so private loans have become an important source of additional funding for education for students. 

Without the undue hardship standard, borrowers could enjoy the 

benefits of their education without having to repay their loans— 

without even attempting to repay their loans—by filing for bankruptcy immediately upon graduation. In the private sector private 

loan industry there is concern that this would lead to one of three 

consequences: first, that private loans would no longer be made; 

private sector lenders would no longer make private educational 

loans. 

You know, they could also require a cosigner or tighten up credit 

granting criteria. And then the third concern that has been expressed to me is that students would simply use private loans instead of Federal loans, knowing that they are fully dischargeable 

immediately upon graduation. 

Congress has not defined the term ‘‘undue hardship,’’ which has 

led to judicial interpretation of that term and reliance on case law. 

The grounds generally include illness, incapacity, extraordinary or 

unique circumstances, like, just, you know, total permanent disability, provision for dependent children, et cetera. 

But it is important to note that since it was not defined in the 

code the case law has developed—a well-developed body of case 

law, frankly—has developed—and the inquiry is very factually-intensive and it requires a trier of fact to make these determinations. 

The bankruptcy judges here, who are the triers of fact, are in the 

best position to evaluate the circumstances of each particular debtor’s case. 

The standard works relatively well, but I will say because of the 

factually-intensive nature of the inquiry, there will be more compelling stories, you know, that—where students have not received 

a discharge. Equally, there will be compelling stories where they 

have. So it varies on a case-by-case basis, but that is the only way 

it can in our system of litigation. 

I would also point out that bankruptcy is a last recourse for debtors. There are certain other administrative benefits that they can 

avail themselves of to mitigate student loan debt. 

Chairman Cohen, Representative Franks, thank you for the opportunity to testify before you today. I will be happy to answer 

your questions. 

[The prepared statement of Mr. Cuthbertson follows:] 

47 

PREPARED STATEMENT OF J. DOUGLAS CUTHBERTSON


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Mr. COHEN. Thank you, Mr. Cuthbertson. I appreciate your testimony. 

Our final witness, our cleanup batter, is Brett Weiss. Mr. Weiss 

currently heads the Bankruptcy and Insolvency Group at Joseph, 

Greenwald & Laake. He is experienced in all the chapters—11, 13, 

and 7. And he has represented individuals, corporate debtors, and 

creditors in all phases of bankruptcy. 

We thank you for your willingness to testify, and would you 

begin your testimony? 

TESTIMONY OF BRETT WEISS, 

JOSEPH, GREENWALD & LAAKE, P.A. 

Mr. WEISS. Thank you, Mr. Chairman, and Members of the Subcommittee. Good afternoon. I am Brett Weiss, a bankruptcy attorney from Greenbelt, Maryland. 

I appear today on behalf of the National Association of Consumer 

Bankruptcy Attorneys, NACBA, and the National Consumer Law 

Center, NCLC. NACBA is the only national organization dedicated 

to serving the needs of consumer bankruptcy attorneys and protecting the rights of consumer debtors in bankruptcy. The nonprofit 

NCLC specializes in consumer issues and has established the Student Loan Borrower Assistance Project, which provides information 

about student loan rights and responsibilities. 

I appreciate the opportunity to speak with you about an issue I 

deal with on a daily basis: the harsh treatment of student loans in 

bankruptcy. Most Americans see a college degree as the single 

most important factor for financial success and a place in the middle class, but with skyrocketing tuition and related expenses, more 

and more students are forced to turn to loans to pay for that education. 

I have three teenaged daughters. One is a college freshman, another a high school senior, and a third is in her last year of middle 

school. I can’t afford out-of-state tuition and costs for all three— 

over $120,000 each for 4 years. And that isn’t even for a top-tier 

college, where those expenses can easily run $50,000 a year, 

$200,000 at the time of graduation. 

Two-thirds of all college students borrow money to pay for college, and due to high tuition and low Federal loan caps, an increasing number take out private student loans. What borrowers are 

finding is that there is no margin of error when it comes to student 

loans. Students who choose public service or other low-paying careers or whose education doesn’t provide the opportunities they expected too often begin their adult lives with student loans they 

can’t pay, creating a financial black hole from which they may 

never emerge. 

I see these people in my office every day, and since the 2005 

bankruptcy law gave private student loans the preferential treatment previously reserved for government-guaranteed student loans, 

there is little I can do to help. These loans are not dischargeable 

except under very extreme circumstances, and even there there is 

a very high cost for them to be able to pay an attorney to represent 

them in the protracted litigation that Mr. Cuthbertson referred to. 

Private student loans are huge profit centers for lenders while 

student often find themselves loaded with high-interest rates and 

56 

mountains of debt. Indeed, interest rates and fees on private loans 

can be as high as those on credit cards, and unlike Federal student 

loans, there is no limit on the size of the private loan and minimal 

regulation of their terms and costs. 

Like other private loans, private student loans are made and 

priced based on risk. There is simply no public policy justification 

to treat this one type of private loan differently by denying a discharge solely because of how the money is used. 

The discharge is a fundamental purpose of individual bankruptcy, providing the unfortunate but honest debtor an important 

fresh start. Exceptions to discharge should be carefully considered 

and adopted only when necessary to further other important policies. Because private student loans are usually made at market 

rates and on the same basis as other loans, we see no reason to 

give them special treatment in bankruptcy. 

Some raise the illusory argument that without this special treatment private student loans will become more expensive and less 

available. Allowing discharge in bankruptcy won’t affect their ability—availability, however, anymore than, as Mr. Chairman noted, 

allowing the discharge of credit card debt and mortgage debt restricts the availability of those types of loans. 

The private student loan industry was expanding rapidly before 

the 2005 amendments. That expansion likely would have continued 

regardless. 

And even after giving them the additional protection in BAPCPA, 

we did not see expanded availability or a reduction in interest 

rates. This suggests that there will be minimal, if any, reduction 

in lending if the law is returned to its pre-2005 status and private 

student loans become dischargeable once again. 

You have already dealt with businesses that are too big to fail. 

Let us not forget those who currently seem to be too small to help. 

NACBA and NCLC urge this Subcommittee and the full Congress to repeal the preferential treatment extended to private student lenders in the 2005 amendment. Thank you very much. 

[The prepared statement of Mr. Weiss follows:] 

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PREPARED STATEMENT OF BRETT WEISS


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Mr. COHEN. Thank you, Mr. Weiss. 

And I want to compliment our panel—the first panel we have 

ever had to conclude on the red light. And I recognize myself now 

for 5 minutes of questioning. 

Professor Pardo, you mentioned a couple possible legislative suggestions. One of them was to clarify, change, make constant the 

definition of undue hardship, I believe, and the other was maybe 

the 86 on the undue hardship, get rid of it. 

Those are different solutions. Which do you think is preferable? 

Mr. PARDO. Well, based on what my studies have shown me and 

in an ideal world if we could start from scratch, I would say that 

all student loans should be dischargeable in bankruptcy. But I realize we are not at that point today; it might be hard to unscramble 

the egg. 

So I propose two solutions. I think the ideal at this point is to 

undo the preferential treatment for private student loans, and at 

the same time recognize the difficulties other student loan debtors 

face in bankruptcy—those who borrow from the Federal Government or nonprofits and the difficulties that they face in litigating 

their claims of undue hardship—and therefore clarify the standard. 

So really, two proposals: If you are going to take the steps to get 

rid of private student loans, at the same time also introduce legislation that clarifies the undue hardship standard. 

Mr. COHEN. So you think we need to do both, clarify the undue— 

one, clarify the undue hardship standard, and two? 

Mr. PARDO. Make private student loans automatically dischargeable. 

Mr. COHEN. Well, if they are automatically dischargeable where 

would you have the undue hardship rule? 

Mr. PARDO. The undue hardship rule would continue to apply for 

either—loans made by the Federal Government, or made by nonprofits, or guaranteed by the Federal Government, or guaranteed 

by nonprofits. 

Mr. COHEN. Okay. Okay. I like your analogy. You know, I have 

heard about making sausage. I had never heard about the scrambled egg, but now we have got all of breakfast together here in 

Congress. 

Mr. Cuthbertson, I appreciated your testimony, and you have a 

different perspective, and I understand where you are coming from. 

And without assuming that your premise is something I concur in, 

the idea that somebody could mount up a lot of debt, not have gone 

in the income world, and discharge their debt and then go on and 

earn their, you know, great bonuses and whatever in the private 

world of life and income doesn’t seem equitable. 

Last year Danny Davis’ amendment was, like, only could discharge it after 5 years, I believe. Is there some time limit that you 

think might be agreeable to where we could get the minority to 

agree to us to make a good egg? 

Mr. CUTHBERTSON. Well, I think the law used to contain a time 

limit in the 1990’s, and it was gradually tightened over the years 

as part of the Clinton administration-supported amendments that 

changed it from—it had been 5 years and then it was changed to 

7, and now taken out altogether. Sure, that is a possible solution. 

67 

Congress would be—you know, it would be a reasonable exercise of 

Congress’ power—— 

Mr. COHEN. Well, we could do a lot, you know, wars—neither 

here nor there. What do you think would be a reasonable solution 

to balance that? I mean, you are coming not representing a client, 

all of a sudden you are the czar. 

Mr. CUTHBERTSON. Well, I think I would agree with Professor 

Pardo that if Congress is going to do anything—take any action in 

this area—that it should clarify the standards for undue hardship 

under the code. I think that is what would be most beneficial. 

If the concern is, you know, a lack of uniformity across the circuits across the country and the concern is the judges are applying 

their judicial discretion in a manner that is not uniform, then Congress could provide direction setting out the standards for undue 

hardship. 

Mr. COHEN. Have any or all of you, or which of you have submitted any proposed definition? Have any of you submitted that? 

No? You could all do that though. 

Mr. PARDO. I have pointed in my written testimony to looking at 

the presumption that exists for undue hardship in the context of 

the approval of reaffirmation agreements in bankruptcy. So a reaffirmation agreement is when the debtor proposes to repay a debt 

that otherwise would have been discharged. 

If that agreement is to be approved and have legally binding effect, one of the things that must be shown is that it will not impose 

an undue hardship on the debtor, and with the 2005 amendments 

Congress included a presumption that basically says, if the debtor’s 

disposable income is insufficient to repay the proposed payments in 

the agreement there is a presumption of undue hardship, meaning 

the agreement will not be—— 

Mr. COHEN. So you think that one flies—— 

Mr. PARDO. I think that would help a lot in two ways. One is, 

it would concentrate, again, the analysis of undue hardship on financial criteria, which I have found in my studies aren’t driving 

outcomes. And really, if you look at both of those provisions they 

ask, ‘‘What is the effect of having to repay a loan?’’ 

Mr. COHEN. I am going to ask each of you, if you would after the 

Committee, to give me what you think is an appropriate legislative 

remedy on this definition. 

Ms. Asher, what do you think about Mr. Cuthbertson’s suggestion that these folks can mount up this large debt, wipe it out, and 

then go on and get into some get-go world? 

Ms. ASHER. Well, I think Professor Pardo has already addressed 

the fact that there was no evidence of abuse of bankruptcy by student borrowers of either type before the bankruptcy laws changed, 

so I wouldn’t expect that to be any different. You have to meet very 

stringent criteria for bankruptcy, and if you are—if you borrowed 

something fraudulently it is not eligible for discharge, even under 

regular discharge rules. 

Mr. COHEN. But you wouldn’t have borrowed it fraudulently. You 

would have borrowed it with all good intents and then you graduated and said, ‘‘Hey, I can start clean.’’ 

Ms. ASHER. Bankruptcy and default are not exactly clean; they 

have very serious and long-term financial consequences. They can 

68 

make it hard to get a job or rent an apartment, or do any of the 

other things that you would need to do to enjoy the benefits of such 

unlikely behavior. But I am not a bankruptcy lawyer. 

So I can say that there—in the industry we have already seen, 

because of the credit crisis, a significant increase in credit standards and the requirement of cosigners for almost all private loans. 

While there was some contraction in the industry because of the 

credit crunch and some very highly leveraged lenders that were 

making, in many cases, some very high-risk loans, Sallie Mae, 

Wells Fargo, Citibank, and increasingly credit unions and now 

some schools are very much still in the private loan game. 

There was huge growth, as I think Professor Pardo noted, from 

2007—from 1997 to 2005 the private loan industry grew—volume 

grew by 800 percent. That was without the benefit of this special 

treatment in bankruptcy. 

The industry seems to have a lot of profit opportunity. Sallie Mae 

still projects that it is going to make a third of its profits or more 

from private loans, so I think that some of the concerns are either 

overblown or have already been addressed by a market correction. 

Mr. COHEN. Mr. Cuthbertson, are you familiar with Professor 

Pardo’s study? 

Mr. CUTHBERTSON. Yes, Chairman, I am. 

Mr. COHEN. Where do you question it? 

Mr. CUTHBERTSON. Well, I guess I question the conclusion that 

Professor Pardo reaches that because—if you accept the premise 

that the undue hardship standard is not being applied uniformly 

by bankruptcy judges that therefore we should just do away with 

the undue hardship standard and make private student loans automatically dischargeable. 

I think, as I said, I think if there is a problem with the application of the standard, Congress can give further direction on what 

the undue hardship standard should entail. I don’t think it necessarily follows that you just scrap the undue hardship test altogether. 

I also would take exception, I think, with the significance placed 

on what Professor Pardo has called ‘‘extralegal factors,’’ those being 

the experience level of debtor’s counsel, creditor’s counsel, bankruptcy judges, predispositions to certain issues. I think those things 

are part and parcel of our system of litigation, and that happens 

in every court, and, you know, there is nothing inherently wrong 

with that. That is the way that every individualized factual determination has to be made, and those factors come into play in all 

types of litigation. 

Mr. COHEN. What about his suggestion—and Ms. Asher seems to 

concur—that there was not a problem with student loans in the 

past and that there has only been a few exceptions that were highlighted to make it look like there was abuse? 

Mr. CUTHBERTSON. Well, I guess I can only say that that is the— 

that was the stated purpose in 1976, and I don’t have empirical 

data to support that there is a lack of abuse or not. 

Mr. COHEN. Thank you, sir. 

Mr. CUTHBERTSON. I would be happy to supplement the record. 

69 

Mr. COHEN. Everybody has an opportunity to do it and we would 

be happy to have your remarks, as you will find out later, to submit later to amend it. Thank you. 

Now that I have taken over my 5 minutes and been a very poor 

example to the witnesses who did so good, I recognize my Ranking 

Member, Mr. Franks. 

Mr. FRANKS. Well, thank you, Mr. Chairman. 

Mr. Cuthbertson, I suppose that in nearly every business endeavor where there is some type of contractual arrangement, and especially if it is a financial one, that the Bankruptcy Code tries to 

make a balance between trying to, you know, encourage people to 

pay their debts and to make it a hard route for them to simply discharge it, and yet to be able to have a pressure relief when it is 

simply—the hardship exists and is simply not reasonable to press 

forward. Obviously as someone who has been in business in the 

past, it occurs to me that those people who make the loans take 

that balance as probably one of their central elements of calculus 

when they decide whether to make a loan or not. 

And that being said, do you think that if the Congress clarified 

the undue hardship provision so that rather than changing—you 

have got private loans; you have got nonprofit loans; you have got 

Federal loans. If we had that as a consistent definition in all of 

them, don’t you think that that would be at least a better way to 

have a consistent lending practice, first of all? 

Mr. CUTHBERTSON. Yes, I do, because the considerations that 

make—that Congress has taken into account to make educational 

loans non-dischargeable apply equally to Federal loans as to private loans. They are both there to ensure access to higher education and its important public policy the Congress has deemed important and to, you know, to make funds available for students to 

attain a post-secondary education. So, whether it is a Federal loan 

or a private loan, they are both serving an important public and 

societal good. 

Now, I do think that if you look at taking away nondischargeability for private loans you have still got the problems 

that are alleged with the application of the undue hardship standard for the Federal loans. So I think that I agree with your assessment. We should—Congress should look at, if it is going to do anything, making that standard clear for all loans. 

Mr. FRANKS. Well, it occurs to me that if we make bankruptcy— 

the easier we make bankruptcy, it occurs to me that the more we 

will have bankruptcy, given that there is pressure on all of us to, 

you know, to try to discharge our debts if there is an easy way to 

do it. Now, do you agree with that, just kind of an affirmative or 

negative? 

Do you think that making bankruptcy—this will make bankruptcy easier if we pass legislation doing away with the, you know, 

the system as it is now? Do you think that this will make bankruptcy easier? 

Mr. CUTHBERTSON. Yes, it—— 

Mr. FRANKS. And do you think that that will increase the incidence of bankruptcy? 

70 

Mr. CUTHBERTSON. It would increase the incidence of—well, yes, 

bankruptcy in—well, in general and the petitions to discharge educational—— 

Mr. FRANKS. Right. Well, I think it is a, you know, maybe it is 

just an old-fashioned perspective, but I think it is probably not a 

good thing for students to start out in life with a bankruptcy on 

their record, just for their own intellectual standing. It just has a 

negative effect. 

And I do think that you are right, that this will increase bankruptcy, and that can’t be a good goal—I don’t think it is—because 

if you increase bankruptcy then you put greater costs on the system. That is inevitable no matter how you face it; somebody has 

to pay for that. 

Now, I know that some of our liberal friends—and I say ‘‘friends’’ 

and I really do mean that. I know they don’t like the word liberal, 

but some of our friends on the left here can’t seem to take—can’t 

seem to understand that you don’t have a free lunch. You just, you 

know, if there is losses that the system has to compensate for that. 

So if Congress amends the Bankruptcy Code to allow private student loans to be unconditionally discharged, will anyone other than 

private lenders have to bear the cost of this change in the law? In 

other words, will there be ancillary impact in other areas? Will this 

make it easier to gain student loans in the future? 

Mr. CUTHBERTSON. No. I think I agree with what you said. You 

know, lenders do take loss expectations into account in pricing 

their loan products, and if there are greater than expected or anticipated losses interest rates will go up, or the credit-granting criteria will be tightened and—— 

Mr. FRANKS. Wouldn’t it be the most naive lender that would not 

take that into consideration? I mean, you would flunk Banking 101 

if you didn’t take your loss ratio into consideration. 

Mr. CUTHBERTSON. I don’t know of any lender that wouldn’t take 

that into consideration. 

Mr. FRANKS. Well, I guess, Mr. Chairman, I won’t belabor the 

point here, but I really am convinced that we could deal with the 

hardship issue effectively. I mean, I am concerned that we might 

go one way or the other too far. But the idea of making bankruptcy 

an easy option—and I think this makes it easier—I think not only 

increases the incidence of bankruptcy, but in the long run it puts 

additional burdens on the system which, in the final analysis, will 

mean less money available for student loans and more bankruptcy 

among our young people. 

And unfortunately, I wish there was an easier way to do all of 

this, but the market sometimes seems to have a wisdom that those 

of us in government just can’t possess no matter how hard we try. 

And so with that I will yield back. 

Mr. COHEN. Thank you. 

Since I am the only one here I—— 

Mr. COHEN. Well, I don’t mean that. I just think that the reference to liberal and left, I don’t know. I think ‘‘liberal’’ is better 

than ‘‘left.’’ I am not sure, but I don’t know where it was directed. 

Anyway, Mr. Coble, you are recognized from North Carolina. 

Mr. COBLE. I was to Mr. Frank’s left. 

Mr. COHEN. I noticed that. 

71 

Mr. FRANKS. You have lots of ground over there, though. 

Mr. COBLE. Good to have the panelists with us. 

Mr. Cuthbertson, maybe I am missing something, but I want to 

extend partially on Mr. Frank’s line of questioning. What lender is 

going to make student loans if the borrower can file Chapter 7 the 

day after graduation and thereby fully discharge the debt, especially given that the means test, as I understand it, would be a 

nonissue for someone that is a borrower with no prior or very low 

levels of employment income? Wouldn’t it be hard to find anyone 

coming forward to make a loan under those conditions? 

Mr. CUTHBERTSON. I think that is certainly the concern amongst 

private sector private loan lenders, yes. 

Mr. COBLE. And some of the testimony today is that private student loans are more akin to credit cards than to financial aid. What 

steps, outside of bankruptcy, can the Congress take to make private student loans more like Federal student loans and less like 

credit cards? I will start with you, Mr. Cuthbertson. 

Mr. CUTHBERTSON. I think, well, Ranking Member Franks mentioned in his opening remarks maybe a more comprehensive reform, if there are abuses in the system, disclosure requirements, 

regulations that would extend benefit programs to private loans, 

those types of things would equalize the playing field, I think. 

My way of thinking is that if you are going to do a bankruptcy 

reform it is very limited. If there are true abuses in the system 

then there are things that maybe Congress could do other than 

limiting it to taking away the discharge exception in bankruptcy. 

Mr. COBLE. Well, that was sort of my thing. 

And Professor, let me bring you in on this. To extend the question somewhat, if private student lenders are, in fact, engaged in 

abusive or misleading lending practices, would we not be better in 

the Congress to regulate those practices than simply making private student loans dischargeable in bankruptcy? 

Mr. PARDO. Well, something has to happen, so the problem with 

the private student loans is that they don’t really offer the same 

robust avenues for relief from financial distress outside of bankruptcy that Federal loans do, for example, a government loan. 

So if you are not going to have those you have to have some sort 

of social safety net, and currently really the only safety net is 

bankruptcy, but it is hit or miss with how an undue hardship discharge proceeding comes out. 

So student loans borrowers who have private student loans who 

can only look to bankruptcy for relief, are going to be in a much 

more difficult situation than borrowers of Federal Government 

loans. 

Mr. COBLE. Mr. Chairman, and I say to the panelists, I am not 

without compassion, but I have some problems about just willynilly discharging debt. That sort of hangs in the craw, Mr. Chairman, and I am not sure that I have any solution. 

Anybody else want to be heard on this? 

Mr. WEISS. With due respect, that just isn’t going to happen. It 

is not going to happen because the system, as it is currently constituted, would not allow a student immediately upon graduation, 

and as some of the apocryphal stories went, on the eve of being emVerDate Aug 31 2005 11:26 Mar 09, 2010 Jkt 000000 PO 00000 Frm 00075 Fmt 6633 Sfmt 6601 H:\WORK\COMM\092309\52412.000 HJUD1 PsN: 52412
72 

ployed in a high-paying position, to go ahead and discharge their 

student loans, their bad save issues. 

And the judges I practice before, and I suspect the judges that 

virtually all of my colleagues practice before, would not allow a discharge to occur under those circumstances for the reason if the 

2005 act is rolled back, we have the 7-year delay from the date that 

the loan first became due before it could be discharged in a Chapter 7. 

Mr. COBLE. Well, Mr. Weiss, how about the student who is not 

employed, does not have employment of a high-ranking firm? 

Mr. WEISS. Well again, if we go back to the previous law they 

would not be able to file immediately upon graduation, and I believe one of the reasons why that time period was imposed was to 

prevent exactly the types of situation that you are referring to. 

I don’t think anyone at this table, any of the bankruptcy practitioners nationally would believe that it would be appropriate for a 

student, absent extraordinary circumstances—severe illness, incapacity, et cetera—to be relieved from their obligation to repay their 

student loans immediately upon graduation. 

Mr. COBLE. Thank you, Mr. Weiss. 

Let me bring Ms. Asher in before my red light illuminates. 

Ms. ASHER. I think it is important to, in addition to the fact 

that—— 

Mr. COBLE. It just illuminated, but I guess the Chairman will go 

along with us. 

Ms. ASHER. Is that all right? 

Students are actively pursued by credit card companies even 

though that debt is dischargeable in bankruptcy. I think—again, I 

am not a bankruptcy lawyer, but ‘‘automatically dischargeable’’ is 

not really how things work. You still have to prove that you can’t 

afford to pay off your particular debts, and they are subject to some 

considerable review within the regular bankruptcy process even 

without the added standard of undue hardship. 

But more importantly, there are such major distinctions between 

private loans as a product—a financial product—and Federal loans 

that we need to look at them in the context of how we treat other 

kinds of debt, like credit card debt, like even in extreme cases gambling debt, in thinking about how people approach bankruptcy. 

Certainly credit card companies have continued to pursue these 

very same kinds of students based on assumptions of future earnings, even without being treated in this unique way that private 

loan companies are. 

And in fact, it has taken an act of Congress to help constrain 

some of the most extreme and abusive marketing practices. I would 

say in this context there may be things that Congress should consider broadly, beyond this jurisdiction, to reign in some of the most 

abusive and consumer-unfriendly practices in the private loan industry. 

Nevertheless, borrowers of all kinds of debt are in need of that 

ultimate relief of bankruptcy should they reach those extreme financial circumstances where it is their only alternative. 

Mr. COHEN. Thank you. 

73 

Thank you, Mr. Coble, who comes from one of the highest, probably, expenses of the public plan in education, University of North 

Carolina—great school, good public plan. 

Professor Pardo, tell me a little more about your study. Did it go 

into the issues of whether or not a lot of student, when they graduated, used bankruptcy to wipe out this debt? 

Mr. PARDO. Well, I will cite two statistics: one, the median age 

of the debtor in my study was 42 years old; the average age was 

45 years old. These are not people who are recent graduates on the 

eve of lucrative careers who have a lifetime of employment ahead 

of them. These are folks who have been trying to make a go of it 

for a long time and they just can’t make ends meet, and they are 

under crushing debt burdens and so they looked to the bankruptcy 

forum as their avenue for relief. 

Mr. COHEN. Before the undue hardship rules—2005 for the private world and maybe I guess it was 1976 for the—was there some 

large number of folks using the bankruptcy—— 

Mr. PARDO. Again, this very Congress commissioned a GAO report to delay the effective date of the provision that would make 

student loans conditionally dischargeable so it could see what had 

been happening in bankruptcy when they were automatically dischargeable, and the GAO report commissioned by this Congress 

found that less than 1 percent of all federally matured student 

loans were discharged in bankruptcy. 

Mr. COHEN. And that covered what year, or years? 

Mr. PARDO. 1975 and 1976. 

Mr. COHEN. Okay. And those were Federal loans? 

Mr. PARDO. Yes. 

Mr. COHEN. Was there a study on private loans? Was that not 

an issue? 

Mr. PARDO. It wasn’t an issue—— 

Mr. COHEN. They didn’t have the undue hardship rule at the 

time? 

Mr. PARDO. There wasn’t the undue hardship rule, but the private student loan market really was not at the point it is today. 

Mr. COHEN. Well, prior to 2005 when the private loans were— 

when the undue hardship rules applied there—prior to that were 

there a lot of private loans that were being bankrupted? 

Mr. PARDO. I don’t know the answer to that. 

Mr. COHEN. Does anybody know the answer to that? 

Mr. CUTHBERTSON. I don’t know the answer but I think that 

there probably weren’t. I would suspect there weren’t because the 

private loans and the private sector private loans have really taken 

off in response to the rapidly increasing cost of college education 

and the caps on the Federal programs. Federal program loans do 

not cover the entire cost of college education in most instances. 

Mr. COHEN. Well, 2 weeks ago—and I don’t know if this is really 

necessarily on point; I think it is, though—we had an economist 

named Joseph Mason, and he testified before this Subcommittee 

that by making the discharge of debt in bankruptcy more difficult, 

the bankruptcy BAPCPA 2005 emboldened leaders to act recklessly 

in their lending practices, ultimately leading to the onset of the 

home foreclosure crisis. And he suggested possibly there was some 

similarity in what might be going on in private student loans. 

74 

Do you think that is—do you have any reason to believe he is 

wrong? 

Mr. CUTHBERTSON. I can’t really speak to that issue. I don’t have 

any reason to believe he is right or wrong, Chairman. I don’t have 

any information—— 

Mr. COHEN. Ms. Asher, do you have any thoughts on that? 

Ms. ASHER. Yes, I do. 

Mr. COHEN. Surprise, surprise. 

Ms. ASHER. In 1997 the National Bankruptcy Review Commission, which is a bipartisan commission founded by Congress, determined that there was no evidence to support the assertion that students systematically abused dischargeability in bankruptcy. 

As to your question about—forgive me, I have just forgotten the 

second part of the question. Oh, did lenders make riskier loans 

after 2005? There is some evidence that the answer is yes. Sallie 

Mae dramatically increased its portfolio of nontraditional subprime 

loans during that time, as I mentioned in my oral testimony. It is 

also spelled out in my written testimony. Finding, not surprisingly, 

that these very, very high-risk loans turned out to have very high 

default rates, it then got out of that business in 2008 when there 

was less access to easy credit and to the securitizations that allowed lenders throughout the economy to make loans to people who 

they knew couldn’t afford them, often under false pretenses, and 

walk away without having to respond to the risk because they had 

been sold down the chain. 

Mr. COHEN. You mention in your testimony, or maybe in response to a question, something about cosigners—private loans and 

they can be discharged—or Federal loans, for that matter, but private loans particularly—and they have got a cosigner. Are most of 

them requiring cosigners now? 

Ms. ASHER. Virtually all require cosigners. There are—— 

Mr. COHEN. And the cosigners—they don’t get out in bankruptcies, do they? 

Ms. ASHER. They are completely on the hook. 

Mr. COHEN. So then how does—so if the student can go ahead 

and get out of their debt to the lender, which is what this would— 

Mr. Franks’ fears would happen—but the lender still gets their 

money because they have got this solvent cosigner, Mr. Franks 

should be happy because the lender is still making money and they 

have got this cosigner on the hook, and the cosigner can always go 

after—well, the cosigner might not—they couldn’t go after the debtor, or could they later on? 

Ms. ASHER. The cosigner is subject to all the same conditions of 

the contract as the primary signer, and that includes no discharge 

in the case of death or disability. I know that someone that we 

work with a lot, Deanne Loonin, who wasn’t able to be here today, 

has a client, a parent who has a child that had a permanent brain 

injury, and that loan is not dischargeable another—even under 

that circumstance, while the student’s Federal loans were. 

Another instance where the parent cosigned—actually, I think in 

this case it might have been a spouse, and the primary borrower 

died before he could finish his education. Again, absolutely no relief. 

75 

And unfortunately, because of the way these loan contracts are 

structured, very differently from Federal loans, the borrowers are 

really at the complete mercy of the private lender in trying to negotiate any kind of accommodation. And when bankruptcy is the only 

possible relief left, they are left with this very arbitrary and onerous process which is not based on the merits of their case. 

Mr. COHEN. Mr. Cuthbertson, what about that? When you have 

got a cosigner, doesn’t that kind of give the lender some solace? 

Mr. CUTHBERTSON. Yes, Chairman, I believe it does, and that is 

probably why they are requiring cosigners, because that makes— 

you know, that makes the borrowers—makes the repayment of the 

loan more likely. 

Mr. COHEN. Even if the borrower can bankrupt it? 

Mr. CUTHBERTSON. Well, yes, because then you have a cosigner 

who—— 

Mr. COHEN. So then isn’t this all kind of semi-academic, except 

for the fact that the college students could be left on the hook and, 

you know, if they want to go bankrupt then they can only go bankrupt for seven—you know, they have got this time limit, they can’t 

do it again, they got it on the record, they got trouble renting an 

apartment, getting a job, whatever, unless they work for their parents in which case they got an apartment and they got a job. The 

borrower is, you know, not out at all. 

Mr. CUTHBERTSON. Well, the co-obligor, or the cosigner, I think 

the issue there would come down to how would that present an 

undue hardship on the cosigner, and that it would be dischargeable 

or non-dischargeable in bankruptcy to the same extent as it would 

be by the student. 

Mr. COHEN. Right. But don’t you think, like, then the cosigner 

is not going to be—maybe I am missing something here. The cosigner is not going to be discharged in that bankruptcy. 

Mr. CUTHBERTSON. Not without showing an undue hardship. 

Mr. COHEN. And the borrower just has to get a cosigner that has 

got some capital, some reserves, which I presume they do anyway. 

So in reality, there is not going to be a problem. They are going 

to get a cosigner that is several years older or already making 

money, got an income stream, got some real property that they can 

attach, and they are going to be happy. 

Mr. CUTHBERTSON. Well, assuming they can do that. I mean, 

most—you know, most students who are applying for college loans 

are 18 and are—— 

Mr. COHEN. Yes, but they are not getting their girlfriend to sign, 

or their boyfriend. I mean, they are getting some older type that 

is willing to help them get through life. 

Mr. CUTHBERTSON. Right. 

Mr. COHEN. Mr. Weiss, is this kind of maybe—isn’t the cosigner 

the answer to the problem? 

Mr. WEISS. Yes and no. You are absolutely correct that if the borrower files for bankruptcy and is discharged then the lender can 

go after the guarantors and, you know, when I applied—when my 

daughter applied for a student loan they needed a guarantor and, 

you know, that was me. So I am very familiar with that process. 

One issue that has been spoken about is that people would view 

bankruptcy as an easy option and sort of willy-nilly, oh, what the 

76 

heck, I will go ahead and file for bankruptcy. That is so far from 

reality, with due respect, that it is just absolutely dead wrong. 

The people who come to see me to file for bankruptcy would rather have a root canal without anesthesia than talk to a bankruptcy 

lawyer. They are embarrassed; they are ashamed; they have been 

trying for years to live up to their obligations and pay their bills, 

and they only come to see me when they are completely incapable 

of doing that. 

Student loans are not the primary factor for bankruptcy. Student 

loans are sort of in the mix for a client who has been ill, or had 

job loss, or their business went down the tubes, largely due to factors outside of their control. People very, very rarely—and the data 

justifies this—file for bankruptcy because of a student loan. It is 

merely one debt that is in the mix. 

Mr. COHEN. I would like to yield to my Ranking Member, who 

maybe has seen the red light. 

Mr. FRANKS. Thank you, Mr. Chairman. 

Ostensibly, when we began this hearing, this was about, at least 

to some degree, how to make it easier on students. In other words, 

we were trying to assist students here. And even though I made 

the case as best I could that I believe in the long run this will hurt 

a larger number of students—it might help some in a challenging 

situation now, but I think it will be to the detriment of a larger 

number of students. That is my personal opinion. 

But now I hear about the cosigners. Sure sounds like we are all 

of a sudden now encouraging an entire class of people to take bankruptcy. And I am not sure that that is good for the system either. 

If we make it—the more we make—the easier we make bankruptcy—I agree with Mr. Cuthbertson’s statement: The easier that 

we make bankruptcy—and again, ask whether it is the right thing 

or not—but the easier we make it, I think the more we increase 

the chances of the loans not being paid back. And if we increase 

the default rate, if we increase loans not being paid back, that 

money has to go—I mean, has to come from somewhere, and I believe that that will decrease the available amount of capital for 

loans. 

Now, you know, we talked about credit cards. Sometimes maybe 

somebody takes out bankruptcy for credit cards might have maybe 

four or five credit cards, $5,000, $6,000 a piece because there is a 

certain cap on credit card lending. But as Mr. Weiss pointed out, 

you know, some of the college education is now around $200,000. 

Well, that is not far from the median price of a house. 

And, you know, if we expect people to make these high-risk loans 

of up to, you know $100,000 or $200,000, for a very good purpose, 

which is to help our young people get education, but if we expect 

the money to be there for them, if that is our purpose, then the 

more we weaken the system by which they can make some type of 

common sense calculation, or at least have some confidence that 

they are going to be repaid, the less they are going to do that. It 

is fundamentally simple. I wish it weren’t. 

I wish there was some way to turn lead into gold. I really do. But 

unfortunately, reality will prevail in this situation, as it always 

has. 

77 

You mentioned, Ms. Asher, related to the—what did you call it 

the Sallie Mae—where a lot of the loans that were made were not 

really very sound loans. Well, now, you know, there was an awful 

lot of pressure on people to make loans that weren’t sound, and did 

that help the people who got the loans? Probably not. Didn’t help 

them much because those loans weren’t sound and they ended up 

getting in trouble anyway. And did that hurt everybody else? Yes, 

I think it did. 

If you apply it to the mortgage industry it was the central element of the entire economic meltdown. It is okay to blame Wall 

Street for some of the bad things they did; they did a lot of bad 

things. But they essentially took loans that were rated a certain 

way and repackaged them and sold them off—and I think there is 

some big problems with that—but they took these loans and they 

repackaged them. 

If the loans had performed as those who rated the loans said 

they would, all of the problems could have fundamentally been 

eradicated. There wouldn’t have been a meltdown if the loans had 

performed but they didn’t. 

And I think that we have to realize that there are about three 

or four factors that give us the best chance of seeing loans perform. 

One is, people have to be able to make a calculation saying, ‘‘Okay, 

this person, they don’t have a job right now,’’ or whatever, they 

have to make a calculation on the person’s ability to repay the 

loan, with cosigner’s help or not. Secondly, they have to make a calculation whether or not the loan can be profitable to them to make 

it at a certain interest rate. 

And all of these calculations have to be in place before they make 

the loan, before any of it happens. And if we tinker with the Bankruptcy Code in ways that will weaken that system—I know there 

is a balance, but if we tinker with ways that will weaken the system I think we will hurt students in the long run. 

And fundamentally I am hoping—and I am going to let this be 

my last word to the Chairman—I am hoping that we can do something to define undue hardship in a way that is in comportment 

with both of our values and with common mathematical sense that 

a businessman or a business individual can make an empirical calculation on so that they can make these loans. 

I think we will be hurting the student loan program in the long 

run or allowing government—or forcing government, as it were— 

to supplant that, which, in the long run, the way things are going, 

someday won’t be there and there will be a day of reckoning that 

will hurt an awful lot of people in a big way. 

And I think we will all be the worse for it, and that example has 

been repeated throughout history. The highway of history is littered with the wreckage of systems that thought government could 

come in and run it better than the private market based on common sense principles. 

And with that, Mr. Chairman, I yield right at the light. 

Mr. COHEN. Thank you, Ranking Member. We appreciate your 

apocalyptical analysis. Yes—— 

Mr. FRANKS. I have never heard of that word. 

Mr. COHEN. Yes, well I might have made that one up. I don’t 

know. 

78 

Apocalypse not—apocalyptical. That is it. I left out a consonant. 

But I appreciate all the testimony and we appreciate Chairman 

George Miller, who couldn’t be with us today, who endorses the 

hearings and thanked us for having these hearings and thinks it 

is important that we get into this issue. 

We are going to look into doing some legislation. As I said, I 

would appreciate each of the Members here submitting to us how 

they think we can define undue hardship to make it a level playing 

field on all the jurisdictions and also any other suggestions they 

have got for the legislation—— 

Mr. FRANKS. Mr. Chairman, with your permission I would like 

to put this statement for the record: Education Finance Council on 

the record, September 23, 2009. 

Mr. COHEN. Without objection. 

Mr. FRANKS. Thank you, sir. 

Mr. COHEN. So done. 

So with that, I would like to thank all the witnesses for their testimony today. Without objection Members will have 5 legislative 

days to submit any additional written questions, which we will forward to the witnesses and ask that you answer them as promptly 

as possible to be made part of the record. Without objection the 

record will remain open for 5 legislative days for the submission of 

any other additional materials. 

[Whereupon, at 3:21 p.m., the Subcommittee was adjourned.] 

(79) 

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

MATERIAL SUBMITTED BY THE HONORABLE TRENT FRANKS, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF ARIZONA, MEMBER, COMMITTEE ON THE JUDICIARY, 

AND RANKING MEMBER, SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE

LAW


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ANSWERS TO POST-HEARING QUESTIONS FROM LAUREN ASHER, 

THE INSTITUTE FOR COLLEGE ACCESS AND SUCCESS


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ANSWERS TO POST-HEARING QUESTIONS FROM RAFAEL I. PARDO, 

SEATTLE UNIVERSITY SCHOOL OF LAW


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ANSWERS TO POST-HEARING QUESTIONS FROM BRETT WEISS, 

JOSEPH, GREENWALD & LAAKE, P.A. 

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PREPARED STATEMENT OF THE AMERICAN ASSOCIATION OF COLLEGIATE REGISTRARS

AND ADMISSIONS OFFICERS (AACRAO), THE AMERICAN ASSOCIATION OF STATE

COLLEGES AND UNIVERSITIES (AASCU), AND THE NATIONAL ASSOCIATION FOR COLLEGE ADMISSION COUNSELING (NACAC) 


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LETTER TO THE HONORABLE STEVE COHEN, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF TENNESSEE, AND CHAIRMAN, SUBCOMMITTEE ON COMMERCIAL AND

ADMINISTRATIVE LAW, FROM RICHARD WILLIAMS, USPIRG HIGHER EDUCATION ASSOCIATE


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96 

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LETTER TO THE HONORABLE STEVE COHEN, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF TENNESSEE, AND CHAIRMAN, SUBCOMMITTEE ON COMMERCIAL AND

ADMINISTRATIVE LAW, FROM A COALITION OF GROUPS IN SUPPORT OF THE ISSUE

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SUBMISSION FROM THE INSTITUTE FOR COLLEGE ACCESS AND SUCCESS


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Æ 


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