Bankruptcy act affects school loans

Students borrowing money for school are not likely to experience any setbacks when the federal government’s stricter bankruptcy laws go into effect Oct. 17.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which adds paperwork, restrictions and fees to the already existing bankruptcy application process, doesn’t apply to student loans, said Ted Malone, director of UAA Financial Aid.

“I doubt they’re going to have a very significant impact,” Malone said. “It’s nearly impossible to get a student loan discharged.”

Stephanie Butler, director of operations at the Alaska Commission for Post-Secondary Education, said students loans have been non-dischargeable since 1998.

“What’s changed is that student loans made by private organizations such as a bank are also non-dischargeable,” she said.

A non-dischargeable loan is one that can’t be forgiven in a bankruptcy case. Malone said bankruptcy judges won’t discharge a student loan unless it will cause the student financial harm, and the federal government won’t discharge most student loans, as a way of protecting itself.

Now students who borrow from banks or private loan foundations must still pay back their debts even if they go bankrupt.

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UAA had a 4.5 percent default rate for 2003, the most recent year for which data are available, the same as the national average, but Alaska’s statewide default rate in 2003 was the nation’s second highest at 7.8 percent after Nevada’s 8.5 percent and Puerto Rico’s 7.2 percent.

Malone said the new federal laws are unlikely to have much effect on students who default, but students who amass credit-card debt are likely to have more problems with debt.

Student loans accumulated by UAA graduates in 2003 ranged from $500 to $60,000. The average borrowing amount was $19,500, and UAA students took out more than $22 million in loans during 2003.

UAA borrowed $27.8 million in 2004-2005 school year, slightly below the $28 million borrowed for 1997-1998.

Malone said the dip resulted from the Alaska Student Loan program starting to do credit assessments on potential borrowers. This caused fewer students to take out loans from the state program, operated through the Alaska Commission on Post-Secondary Education.

Butler, director of operations for the commission, said the credit assessments have dropped the default rate in Alaska student loans to 4.6 percent. The default rate for Alaska students taking federal loans through ACPE is 6.5 percent.

Butler said credit assessments and educating students before taking out loans helped lower the default rate.

“[We use] lots of up-front education to help folks not reach the point where they don’t think they can pay off their loans,” Butler said.

Malone said UAA, like other schools who offer federal student loans, is required by the federal government to provide loan counseling to student borrowers. Schools whose student default rates exceed 20 percent face extra requirements and penalties such as being expelled from the Pell Grant program.

“There’s a federal student loan requirement that students go through an entrance counseling to make them an informed consumer,” Malone said. The program at UAA is online and covers loan information like interest and repayment rates. Students who don’t complete the loan counseling don’t get loans.

“We have a number of students now who have loans pending that we’ve received the funds who haven’t finished the loan counseling,” Malone said. The entrance counseling requirement for federal student loans started around 1989.

While preventive measures like credit assessments and loan counseling have lowered the default rate, both Malone and Butler said some student borrowers are less likely to default on loans than others.

“We do know that students who have a higher principle balance are less likely to default,” Butler said. Higher principle balances _” the initial amount a student borrows _” indicate the student finished more years of school, earning them a higher-paying job.

Malone said the students who don’t finish their first year of school are most likely to default on loans.

“They don’t see themselves as having gotten anything out of their education,” Malone said. “Credit in general, and student loans specifically, [are] kind of like a chainsaw. It’s a tool for a very specific purpose and the purpose of a student loan is to allow you to complete your education in a timely fashion which you wouldn’t be able to do without it.”