The American Bankruptcy Institute, meeting at the Newport Marriott, has called for amendments to bankruptcy laws to address the significant obstacles blocking the discharge of student loan debt.

NEWPORT — Your grandchild asks you to co-sign a student loan. What does Perry O’Brian think you should do?

“Don’t.”

The bankruptcy attorney from Bangor, Maine, immediately offered that one-word answer when this scenario was presented to him Friday after he spoke at a consumer forum on student loans at the Newport Marriott.

O’Brian is one of over 200 insolvency experts who converged upon the city for the American Bankruptcy Institute’s (ABI) 2019 Northeast Bankruptcy Conference and Northeast Consumer Forum. Over the last several years, O'Brian's law practice has primarily focused on representing people overwhelmed by student loan debt, now the second highest type of personal debt after home mortgages.

Total outstanding student loan debt keeps accelerating. It’s worth noting that the regional conference program for the national association of bankruptcy professionals and the slides of one presenter on the student loan panel listed the amount of U.S. student debt obligations at over $1.5 trillion. That figure is actually now $1.6 trillion, said Boston attorney Adam S. Minsky.

Approximately 44 million Americans, about one in nine people, carry student loans. Last year, the average undergraduate completed college owing over $28,000, according to the Institute for College Access & Success.

Student loans typically never go away, even if a person files for bankruptcy protection. A law passed by Congress in 2005 ensured that no student loan — federal or private — could be discharged in bankruptcy unless the borrower can prove that repayment would result in an “undue hardship.” Congress didn't define "undue hardship" by statute so it has been defined by case law, Minsky said. Typically the person has a severe disability and the hardship exists long-term. But courts also look at whether the debtor has made good faith efforts to repay the loan.

O’Brian told of a husband and wife who worked at the University of Maine, Orono, who came to see him with $75,000 in credit card debt and $273,000 in combined student loan debt. They were half-way through the Public Service Loan Forgiveness Program, which forgives the remaining balance on direct student loans after making 120 qualifying monthly payments while working full-time for a government or nonprofit agency or organization.

But while filing for Chapter 13 bankruptcy placed the couple's student loans on hold, they would continue to accrue interest. That meant that over the course of five years of bankruptcy protection, their loans would have grown by another $81,000, O’Brian said.

His clients ultimately withdrew their petition and are making the minimum payments on their credit card debt in order to continue the loan forgiveness program.

ABI's Commission on Consumer Bankruptcy has recognized the bankruptcy system’s ineffectiveness at addressing the problem of too much student debt, what many have called a crisis that depresses economic activity. Academic studies have associated student debt with lower earnings of college graduates, lower levels of home ownership, delayed marriage, lower probability of students choosing public-service careers, and poorer mental health.

In April, the commission released a report recommending statutory amendments to discharge student loans made by nongovernmental entities and those incurred by someone other than the student receiving the education being financed. Other recommendations sought to guide eligibility criteria for discharging student loans that are being paid through a five-year Chapter 13 plan or those that first became payable less than seven years before a bankruptcy case was filed, regardless of any suspension of payments.

“Crisis is probably an understatement,” O’Brian said of the struggle facing those who are stuck with education debt. “It’s dragging down a whole generation of people.”

Borrowers who go to for-profit schools and those who drop out of college have been shown to be most likely to default, meaning their debt is transferred to a third-party collector. Those who default on student loan debt can end up having their wages and Social Security checks garnished.

Chief Judge Peter G. Cary of U.S. Bankruptcy Court for the District of Maine declined to go on the record when asked to comment on whether or not to co-sign a grandchild’s student loan.

“It is an area fraught with problems right now, and it’s creating a potential for huge economic problems,” Cary said.

“The bankruptcy system is one of the last strands of the social safety net and so it really does provide a vehicle to address poverty, but in and of itself, it’s not a cure-all.”

jweisman@newportri.com