• September 1, 2014

Lawmakers Introduce Bills to Change Student-Loan Bankruptcy Policy

Valisha Cooks thought that attending the University of Phoenix would improve her financial future. Ms. Cooks instead graduated with $41,000 in federal loans and $36,000 in private loans and soon began racking up medical bills after a difficult pregnancy She filed for bankruptcy, but that did nothing to abolish her private student loans. A collection agency is asking her to pay $627 a month—an amount she says she cannot pay in full.

"When I took out private student loans, I had no idea that I was condemning myself to a lifetime of ruined credit, harassment by collection agencies, and the hopelessness of endless debt," Ms. Cooks, a program assistant at the University of California at Los Angeles, told members of a subcommittee of the House Judiciary Committee during a hearing Thursday on the issue of discharging private student-loan debt in bankruptcy.

Lawmakers introduced bills in both the U.S. House of Representatives and the Senate this month that would allow borrowers like Ms. Cooks to more easily expunge their private student-loan debts through bankruptcy. Under current law, private student loans cannot be discharged unless borrowers can prove that repaying the loans would be an "undue hardship," a legal standard that has been applied inconsistently over time.

Help With Private Loans

By comparison, mortgages, credit-card balances, and even gambling debts can be excused without showing undue hardship. The bill would end the undue-hardship standard for private student loans, allowing those debts to be dismissed through the same process as most other forms of private debt.

Rep. Stephen I. Cohen, Democrat of Tennessee and sponsor of the House bill (HR 5043), said at Thursday's subcommittee hearing that the legislation would provide a critical safety net for individuals struggling because of unforeseen financial circumstances.

Supporters of the legislation say it would restore fairness to the bankruptcy system by treating private student loans like other types of private debt. Rep. Hank Johnson, Democrat of Georgia, said private student loans taken out by well-meaning students eager to get a college education should not be lumped into the same class as other debts that cannot be easily erased through bankruptcy, such as child support and alimony.

Under the bill, borrowers would still be required to repay federally subsidized loans after filing for bankruptcy, but supporters of the measure drew a distinction between those federal loans and private loans. Private loans lack the protections provided by federal loans, such as caps on interest rates. Those rates can reach double digits for private loans—double or triple the rates for federal loans.

"Private student-loan borrowers are often unable to work out terms that ensure a reasonable and fair payment schedule," said Representative Johnson. in contrasting the two types of loans.

Republicans' Concerns

But the legislation faces some Republican opposition. Rep. Trent Franks, Republican of Arizona, said the legislation would "discourage private lending and encourage abuse of the bankruptcy system."

John A. Hupalo, managing director of a group specializing in student-loan finance at Samuel A. Ramirez & Co., a securities firm specializing in student-loan finance, warned that interest rates for all borrowers of private student loans would have to rise to compensate for the increased risk that borrowers would eliminate their private-student loan debt through bankruptcy.

The introduction of the bill follows the passage of the student-loan overhaul in March (HR 4872), which ended the bank-based distribution of federally subsidized student loans. Representative Franks said the new bill would "have the effect of shrinking an already depressed private student-loan market."

Supporters of the bill dismissed the idea that the legislation would drastically alter the ability of private companies to conduct student-loan business. Until a 2005 change in the bankruptcy code, private loans could be eliminated through bankruptcy. Private lenders then argued that the change in the policy would allow them to offer loans to a broader spectrum of students, including those with lower credit scores.

But supporters of the new bill worry that private lenders are making loans to some students who are likely to default. Deanne Loonin, a lawyer for the National Consumer Law Center, a nonprofit group, likened some private loans to subprime mortgage lending. She pointed out that in both cases, loans have been offered to people with little ability to repay.

Members of Congress have made several attempts to change the bankruptcy law since 2005. In 2007, Sen. Richard J. Durbin, Democrat of Illinois who introduced the Senate version of the bill (S 3219), offered similar legislation, but it was never voted out of committee.

The prospects of the new bills are unclear, but passing such a controversial measure could be a challenge for Democrats in an election year.

Comments

1. atana09 - April 23, 2010 at 09:22 am

Well it's about time for some genuine attempt to restore consumer rights in regards to some of these loans. Back in the unholy birth of the removal of these rights, it was premised on the lie that defaults were unreasonably high. Ironically these were much higher after that provision was allowed, because the lenders made a killing by enhancing fees, interest and generally tying barbed wire nooses around troubled borrowers.
Now the same old gang is trying to block reforms regarding restoration of bankruptcy protection and these private loans. Well perhaps it is past time for these companies to actually have some risk involved in their lending practices. Private educational lenders are notorious for making deals with schools which have questionable credibility, which often operate in economically deprived areas or do so by secondary presence such as the internet. That combined with the average 6% yearly increases in tuition has placed many students into unsustainable and impossible to pay debts. In their case these lenders and certain schools have become more predatory than rent to owns and payday loans. The difference of course is that there is at least some recourse or eventual remedy for a overpriced coach or payday loan. Not so for these student loans.
And its also interesting that the lenders shills are still trying to block reforms, despite the fact they know these lenders have propagated a 580 billion dollar bubble with student lending. That amount has been massively over leveraged, and as our economy worsens fewer and fewer people will be able to pay the tolls. So in reality the shills choice is to continue to allow this bubble to build whilst condemning millions to economic ruin when due to the effect of a shattered economy they can no longer pay.
Servants of the people indeed...or is it serving up the people...

2. tappat - April 23, 2010 at 10:21 am

While I do think the private student loan business corrupt and desperately in need of reformation, I can't help but notice that this person's terrible debt was incurred at a for-profit enterprise. These enterprises need to be held responsible for such outcomes; private lenders should be directed back to the private enterprise, under these circumstances, and the private enterprise should have to repay, with interest, the loans. Even under such an arrangement, the private enterprise should be able to make a tidy profit, if it uses its capital well, since, even for failures, it will have had the money for the failure for a good period of time, long enough to do enough with the money to be able to repay it, with interest, and still have excess or profit. For the successes, it keeps all the money, of course.

3. charlesr - April 24, 2010 at 02:57 pm

Regardless of how you view student lenders, this proposed change in bankruptcy law will make it more difficult and expensive for students to obtain private loans. This increases the riskiness of the loans and and lenders will react rationally by raising interest rates and decreasing availability for marginal borrowers.

4. studentloanjustice - April 25, 2010 at 09:33 pm

Comment 3 is precisely the sort of knee jerk rhetoric that lending interests have been using for years. However, it seems that perhaps the public no longer is buying the propoganda that the lenders are selling so quickly.

Anyone who looks at the student loan system closely finds quickly that the removal of consumer protections, most notably bankruptcy (but also others, including statutes of limitations, fair debt collection laws, usury laws, truth in lending laws,etc.) have fueled a massive INCREASE in the cost of college that far outweighs any savings in interest, fees, etc. that lenders might say the borrowers receive.

There was never any rational basis for removing bankruptcy protections from student loans generally. The fact that this removal was somehow extended to private loans in 2005 was clear evidence of how strong the lenders were on capitol hill, and how weak and/or subverted the student loan advocates had become.


Controversial? C'mon, now...there is NOTHING remotely controversial in this bill. It shouldn't even be needed, because the lenders should have never gotten it through in the first place. The only controversy is why this happened in the first place, why the student advocates will support this, but not the return of bankruptcy protections to ALL student loans.

It is only by returning bankruptcy and other consumer protections to student loans that the price of college might be brought back down to reality. As long as this is not the case, college prices will continue to grow...this should be a concern for all students...not just those who borrow.


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