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May 31, 2016

Vermont House asks Congress to let students file for bankruptcy

With national student loan debt tripling to more than $1 trillion over the past decade and Vermont’s graduates stuck with the highest debt-to-earnings ratio, state lawmakers are urging Congress to let students file for bankruptcy.

On Monday, May 2, members of the Vermont House gave preliminary approval to J.R.H. 27, a joint resolution that calls for “federal action to alleviate the national student loan debt crisis.” Federal bankruptcy code prohibits student loan borrowers from declaring bankruptcy in most cases.

“The General Assembly requests Congress to amend the federal bankruptcy code to eliminate the prohibition on relief from federal or private student loan debt through the federal bankruptcy system,” the resolution states.

J.R.H. 27 highlights sobering statistics illustrating the scope of problem. Nationwide, almost 7 million student loan borrowers, or 17 percent, are in default as of summer 2015. This is up by 400,000 defaults, or 6 percent, compared to 2014. Student loan debt tripled between 2005 and 2015, rising to $1.19 trillion, according to the Federal Reserve Bank of New York’s Consumer Credit Panel.

Interest rates aren’t helping much. Direct subsidized and unsubsidized undergraduate student loans have a rate of 4.29 percent for 2015-2016, but other federal student loan rates have been as high as 9 percent in recent years. Graduate and professional federal student loan interest rates in the Direct PLUS Loans program currently stand at 6.84 percent.

While the resolution doesn’t detail Vermont’s student loan woes, a U.S. Congressional Joint Economic Committee report from 2013 found that Vermont graduates have the highest student loan debt-to-earnings ratio in the nation, according to Vermont Business Magazine.

“In Vermont, 63 percent of college graduates hold student loans. The average balance is $28,860. That debt load amounts to 82 percent of the average annual income for recent graduates, a ratio of debt to earnings that ranks Vermont the highest in the nation and the only state over 80 percent.” the article states.

The resolution adopted Monday urges the U.S. Department of Education “to devise new debt relief programs that effectively address the problems that individuals with low income are encountering in repaying their student loans.” The request will be sent to U.S. Secretary of Education John King and to the Vermont congressional delegation.

Chris D’Elia, president of the Vermont Bankers Association, testified before the House Education Committee last Thursday on the matter.

“What we’ve seen in our world over time is this growing debt crisis,” D’Elia said. “People have been given access to funding and they’ve racked up these student loans at 6.9 or 7.9 percent interest, which is outrageous from our perspective. At some point we think this is all going to come crumbling down.

“A lot of people in my industry think this is the next crisis, the next bubble that is going to burst out there,” he continued. “How are we going to deal with all of these students and these parents who are likely going to default? We are already seeing defaulting numbers going up and up.”

Despite the high rate of defaults, federal lenders aren’t losing money. In 2014, U.S. Sen. Elizabeth Warren, D-Mass., citing a Government Accountability Office (GAO) report, expressed shock that federal lenders were on pace to produce $66 billion in profits for the U.S. government for loans originating between 2007 and 2012.

D’Elia said young people are putting off important life decisions such as marriage or home purchases because of looming debts. “It’s tough enough paying off $34,000 worth of debt and trying to put 20 percent away to buy a home or buy a car,” he said. “And then look at the economic environment and job opportunities, and does your income match up with what you need in order to live?”

Beth Pearce, Vermont’s state treasurer, also spoke before the committee. “Clearly student debt is up at an alarming rate. I think I saw the number $1.2 trillion, and that was as of last December,” she said. “That’s a pretty scary situation.” Pearce said students should receive financial counseling when they take student loans so that “it isn’t just a factory spitting out loans.”

Rep. Alice Miller, D-Shaftsbury, a member of the House Education Committee, said fewer Vermont kids are even going to college. “We have a very high graduation rate from high school in Vermont but a very low rate of high school graduates going on to college, and I believe that’s because of the costs,” Miller told Vermont Watchdog.

“(It’s especially true) for first-generation students — kids who are the first in their families to go to college,” she added. “That’s very serious because in today’s world you just can’t make the living that you used to be able to make with just a high school degree.”

Miller said the state contributes very little to higher education. “Vermont is unable to give more financial aid, and therefore the schools have to increase the tuition because they are not getting support from the state,” she said. “The reason is because we are very small and we don’t have the money. We have so many needs in this state for parents and children, and so many health costs, education, special needs, just all kinds of things.”

Miller said student loans will likely be a top priority for the committee during next year’s session. She also expressed confidence that Vermont’s elected representatives in Washington will make things happen this year. “They are very responsive to us, very much so,” said Miller. “I mean Congressman Welch, Senator Sanders, Senator Leahy—each of them are very responsive. That is one of the great things about this state.”

J.R.H 27 had its third and final reading Tuesday, May 3, on the House floor and was adopted. On May 5, the Senate had its first reading of the bill and referred it to the Committee on Education.

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