Private Student Loan Scam and How Bankruptcy Law Contributes

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A Former Student’s Personal Story

A former student at the Art Institutes, a school listed under the Education Management Corporation which is currently being sued by the Federal Government for fraud, recently posted a personal bankruptcy story on a website about how a scam of a private student loan bankrupt her.

The former student wrote, “I am currently $80,000 in debt and still have no diploma. I was misled when enrolling at the school about graduation, employment rates, credit transferability and quality of the school itself. I am now stuck with debt that there is no way I will be able to pay off. I am a single mom, a full time student at a different college now, and I feel victimized.”

How Our Bankruptcy System Contributes to the Scam of Our Students

From the thousands of testimonies you can read on the internet, this former student’s story is just one amongst many stories stories about how a private student loan scam is now common, and the students are the victims. The United States Bankruptcy System and  laws contribute to this scam that victimizes our college students.

In 2005, Congress passed new bankruptcy laws under the Bankruptcy Abuse Prevention and Consumer Protection Act that added private student loans to discharge exemption status in bankruptcy cases. That means anyone who gets a private student loan can no longer have the loan discharged during any bankruptcy proceeding. In addition, the new laws provide a risk free loan for the lender.

These new risk free loans along with the protection of a bankruptcy discharge exemption encouraged the private student loan sector to expand. With expansion of the new easy loans, problems of scams and corruption rose just as fast. In 2007, New York State Attorney General, Andrew Cuomo, made an investigation into anti-competitive relationships between colleges and private student loan lenders. Many universities were expected of steering student borrowers to their preferred lenders. The students incurred higher interest rates and the university financial staffs who steered the students were allegedly offered monetary kickbacks from the lenders. These accusations are still under investigation.

Former Law Changes Also Contribute to the Problem

In 1978, the Supreme Court made a ruling that would change the face of how banks reasonably dealt with credit card interest. Since then, this move has affected the foundation of how banks charge interest in general. Basically, the ruling undermined existing state usury laws, especially concerning loans in default. Banks now feel the freedom to be more bold in what they charge lenders in interest after default on a loan, penalties and fees. The laws in this area have become circumvented with other existing laws so the average person cannot understand which is which.

What Might be Done About the Problem

Probably the only thing you can do about this particular problem is to elect someone who will change bankruptcy laws. The New York Times recently published an article endorsing the return of bankruptcy protection for private student loans. The elimination of the exemption to discharge is one way of forcing the scam artists to the table.

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As a society, we cannot function without laws to provide a level playing field for all of us so we may avoid scam. If you have been victimized by scam and are now bankrupt, find a bankruptcy attorney today.

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