Recently, a bankruptcy trustee in New Haven Connecticut filed suit against Johnson & Wales University alleging that tuition payments made by the debtors should be returned by the University. The trustee is alleging that the debtors’ daughter benefitted from the payments made to the University and not the debtors.
It is reported that 3.1 million parents owe a combined $68 billion under the Parent Plus student loan program. Although parents do not directly derive a benefit from making such student loan payments, they are treated as obligors to the debt and are therefore personally liable on the student loans. This has caused some bankruptcy trustees to seek the return of funds that parents have contributed towards the costs of college.
Battles between bankruptcy trustees and colleges are on the rise. Historically, bankruptcy trustees did not pursue tuition payments made by debtors on behalf of their children because such payments were not as large or prevalent. Now, with college costs rising, this trend will continue because more parents are contributing larger sums to their kids. Member of the House Chris Collins (R-NY) recently introduced a bill designed to prevent trustees from pursuing these payments when they were made several years ago.
Although Collins’s bill might reduce the prevalence of these types of lawsuits, they do not seem to be slowing down at the moment. Student loans account for a large portion of the debts of many Americans. Legislating the ability to discharge student loans will not be accomplished any time soon. However, given the growing mountain of student loan debt, there will need to be some kind of safety valve for overburdened student borrowers and the economy that depends on them. A generation of people unable to spend money in the marketplace does not make for a healthy economy.
To read more about the Johnson & Wales University case, please click here.
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