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The NYT on Intermediaries and Student Loans

posted by Bob Lawless

The New York Times ran an important story today by Natalie Kitroeff on the role of Educational Credit Management Corporation in policing student loans in bankruptcy. It is a story that should interest all Credit Slips readers.

Observers of the legal scene often underestimate the role that intermediaries play in shaping not only the court system but the legal doctrine itself. In the story, Ms. Kitroeff mentions a decision of the U.S. Court of Appeals for the Eighth Circuit that essentially adopted Educational Credit's loan repayment guidelines as the legal standard for what constitutes "undue hardship" for a discharge. One could ponder how the legal doctrine on undue hardship might look if Educational Credit was not pushing so hard in one direction.


If a large number of indebted students took the Espinosa (United v Espinosa) route and filed a chapter 13 and only listed student loans (its own class separate from general unsecured creditors), offered a repayment plan (all DMI), and got that plan confirmed without challenge (not a %100 probability), the system might bend enough to let a high percentage of student loans slip through the discharge.

The problems with the Espinosa approach (which would likely require a Ch. 20 to burn off other unsecured debt, since few courts have looked favorably on separately classifying student loans from dischargable unsecured claims) are first, that student loan servicers are hip to that idea and because bankruptcy judges (and Ch. 13 trustees) don't read Espinosa to encourage creative (or "gotcha") plans, but instead that it was a directive to prevent such plans under theyre "gatekeeper" function. So even if ECMC doesn't object, many bankruptcy judge and trustees will on their own.

Hi Bob, we’ve taken a quick look at consumer complaints about student loans, as part of our ongoing analysis of the CFPB complaint database. You can take a look at our findings on the Beyond the Arc blog: http://j.mp/L1j65g

It will be interesting to see if there are public policy developments that emerge from states like Massachusetts.

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