A promissory note is a written agreement between a borrower and a lender that contains the details of a loan and the procedures for repayment.  Promisorry notes to repay home mortgages and student loans are two of the most popular examples.  However, the use of promissory notes in these areas are now being fundamentally altered.  While the housing and educational loan markets were red hot just a few years ago, recent changes in those markets are now causing a rewrite of certain financial laws and lives.

Four years ago the fixed interest rate on a federal Stafford student loan was at an historical law, 3.37%.  Today it is 6.3%, an increase of 186% in just four years, and is still rising.  Interest rates for home loans have not risen as much percentage wise because they were never as low as student loans, but they have risen so dramatically in dollar amounts that Congress is about to rewrite the bankruptcy laws.  Bankruptcy judges are about to be allowed to rewrite mortgages to allow homeowners to stay in homes that they can no longer afford.  While students who are increasingly borrowing six figures to get a job are seeing no relief.

Educational loans are unsecured notes while mortgages are secured notes. A secured note has property attached as collateral, in a mortgage it is the home.  If a borrower defaults on their repayment of a secured loan the lender has the right to foreclose on the collateral, even if the borrower files for bankruptcy.  If a borrower defaults on an unsecured loan and declares bankruptcy the lender’s only recourse is to go to court to try to collect what the borrower can repay, like a credit card.

Congress is about to pass a law that will allow a homeowner to go through bankruptcy and come out with their home loan substantially rewritten.  Right now there is no such relief for student loan borrowers.  Most student borrowers would not receive a benefit by filing for bankruptcy because most educational loans are federal Stafford or Perkins loans, and federal loans are explicitly exempt from discharge in any bankruptcy proceeding.

A million dollar home is a luxury not a necessity.  Today’s economy makes a college education a necessity not a luxury.  Congress will allow irresponsible homeowners to escape while responsible students who have no choice but to borrow more and more will sink into unaffordable debt.