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September 15, 2010, 02:58 PM ET

Bill to Restore Bankruptcy Protections to Private Student Loans Advances in House

Federal legislation that would restore bankruptcy protections to private student loans cleared a first hurdle today, passing 6 to 3 in a vote by a panel of the House of Representatives Judiciary Committee. The bill, which has been offered in several previous congressional sessions, still faces long odds, however. Many Republicans oppose the measure, warning that it would drive up interest rates and further shrink the market for private loans, and the congressional legislative session is winding down. Only four weeks remain before the House's target date to adjourn.

Comments

1. 11132507 - September 16, 2010 at 07:29 am

Of course Republicans oppose the measure. First, it was proposed by Democrats, so their opposition is automatic to begin with. It protects needy students, never a high priority group on the Republican agenda. But most importantly, Republican campaign chests are chock full of private lender bribes/donations/PAC money, the Boehners and McKeons of Congress are always looking out for the lenders who write the checks.

2. davi2665 - September 16, 2010 at 09:04 am

How amusing that commenter 11132507 singles out Republicans for commentary on misdeeds, when the house and senate is overflowing with Democrats (such as good ol Charlie Rangel) whose actions wildly exceed those on the other side of the aisle. The real concern is that bankruptcy protection condones and encourages students to blow off loan payments, thereby reducing repayments back to the system. It works similar to the housing scam that our favorate legislator "Barney" instituted for Freddie Mac and Fanny Mae. However, there is hope on the horizon. With the insane multi-trillion dollar spending spree of the Democrats, and the overtime activities of the Obama printing press for dollars, our students will soon be able to pay off their student loans with the useless inflated US currency, which is inevitable, thereby getting the same "free pass" that bankruptcy protection would offer.

3. atana09 - September 16, 2010 at 09:36 am

"The real concern is that bankruptcy protection condones and encourages students to blow off loan payments, thereby reducing repayments back to the system"

Which unfortunately is the same form of stereotypical misinformation which lead to the removal of the basic consumer protections from student loans (private or government). And as appealing as it is, it is no more truthful than the old welfare queen with Cadillac shill. What did result from this little lie is a system wherein the lenders can apply appalling fees onto troubled borrowers (200% in one notorious case) and create a condition where defaults are actually quite profitable to them. In the largest lenders the most profitable divisions of their companies have tended to be collections, its all about service right?

And defaults actually seemed to have increased when the protections were removed, despite the efforts of the edudebt industry to doctor the data. For example the short term reporting of defaults is a strategy to hid how impossible student debt has become under their influence. It is much worse than the halcyon days when loans and grants were mainly public. And when college costs became so closely linked to the profits for lenders, one raised the other leading to the 6% yearly increases in tuition we so enjoy today.

Additionally obstruction of bills to restore consumer protection has largely been driven by the GOP, which is ironic given their public persona of 'small town values' and Christian morality. The structure by which student loans operate in this country, is for most people, the most intense experience they will have in legalized usury. And going back to the scriptures there are those little proscriptions against establishing impossible to pay debts.

About all the money and spend and tax, well then what about the 9.5% scandal, the bailouts of the edudebt industry a few years back, or the constant scandalous individual over billings? Or is concern for the deficient limited to when the common man is being helped out of a hole. And perhaps conveniently doesn't extend to corporate takeovers of what had been workable government programs? And their turning these programs into very expensive corporatist sugar and cake binges?

Restoring bankruptcy protections to the people might save an entire educational lost generation from ruin, even if it is at the cost of putting usurious corporate lenders back on a very limited leash.

4. cwinton - September 16, 2010 at 09:55 am

The GOP deserves to be pilloried on this one. Student loans have become the modern equivalent of owing one's soul to the company store.

5. 11221879 - September 16, 2010 at 01:50 pm

Lending money is a business based on risk. Risk analysis for private student loans is primarily measured on ability to repay and collateral. Most private student loans are approved after a check credit and a debt to income review. However, there is no collateral such as a home loan or an auto loan. If the debt goes sour, there is nothing to collect (i.e. repo the car) except the money. Allowing bankruptcy just adds to the risk which will increase the cost of getting the loan. And those who pay that price are the ones who will pay back their loan. Additionally, many Universities offer institutional loans that are categorized as Private Loans and they would fall under the same "consumer protection laws" as traditional private loans. Institutions typically don't charge a fee nor do they review credit. These loans are funded through donor contributions. The loan funds are revolving and if they are not paid back then the funds diminish over time and fewer students are able to benefit from these loans due to others not paying them back. So who are we really protecting? And by the way, where is individual accountability? The borrower must be smart in borrowing. You see people spending more time buying a car, reading reviews, checking Edmunds.com, test driving and haggling with a salesman than they do spending time researching lending options and their ability to repay...

6. atana09 - September 16, 2010 at 02:25 pm

Interesting that the personal accountability card is tossed out so often when referring to student borrowers but not for the lending industry. Which incidentally only exists as a result of governmental abrogation or complicity so it hardly bears comparison to a 'free market' enterprise.
The problem of course is that the US as contrasted to other first world countries has allowed its higher education system to be corrupted into a debt based model. One which is in no way free market, but rather a product of cabals. Schools may 'chose' to work with given lenders, and as made evident by the recent scandals in NY, this had lead to massive corruption. So we have created a system by which students must borrow and often have to do so through companies which are not compelled by any real regulations to act ethically.
And as far as personal responsibility it seems the CEO's of these companies somehow are excempt from that standard. A few bankrupt students have not cost the common in our country, near the amounts for overbillings, scandals, and other neferiouis goings on for which the student loan industry is so noted. Some of these companies have been so badly managed that even the bond ratings agencies have had to take notice and warn investors.
So moral condemnation of students in trouble (in a rigged system) compared to the student lending industry is roughly the equivalent of discussing the sins of "Barney" relative to Beezelbub, no matter how much shifting about is done it can't be made equivalent.
Bankruptcy protections should be restored for no other reason that it might be a means to counteract companies which have rampaged throughout academe for a generation and have brought that system morally down with their greed.

7. whm3113 - September 16, 2010 at 05:38 pm

After the bankruptcy protections are restored to private student loans lenders will leave that market. (For the most part, the market didn't exist until the lenders had this provision). Upon the lender's exit there will be students and parents who will be unable to pay for the school of their choice. I'm not saying this is wrong, or bad, but let's keep in mind that this is the inevenitable result.

Some students and parents are borrowing much more than they should for a college education. Often this is happening because they are making decisions based on emotion rather than logic.

And to the previous poster "atana09", we must have different definitions of "massive corruption". From the news reports I've seen, the lenders were mostly providing the schools with printing services and lunch.

8. atana09 - September 16, 2010 at 07:07 pm

"From the news reports I've seen, the lenders were mostly providing the schools with printing services and lunch."

Unfortunately what they were doing went well beyond lunch and printing services. One trick was to provide promotional and support materials which implied that the institution and the lending entity were one body, or so closely associated with that lender that it left the impression amongst students that there were no alternatives. That alone should have been enough for a RICO or fraud investigation. And incidentally this is still going on in certain areas not under the NY courts venue. And in the investigations by the NYS AG there was evidence of spiffs considerably more extensive than lunch at the McDonald's.

As far as other massive corruption, look into the 9.5 scandal, the overbillings under the Spellings USDOE, abuses on the proper receipt of student payments and etc. Chronicle's Investigative reporters and others such as Inside Higher Ed have done a fine job in exposing these problems. In just one over billing (the 250+ million incident) that Oberg exposed would have been enough funding to pay the first two years of college for virtually all the college students in a medium sized state.

Concerning whether the lenders leave the market; We need to consider that this market only exists because of a generational transfer away from student financing systems which had worked quite well over towards the privatized/corporate loan model. And the rise of that system is closely correlated with the insane increases in tuition. The debt for education model provided a bizarre condition wherein the operative costs of college were transferred onto students and families and so the consequences became out of sight out of mind. A result was for academe and through government it led to low levels of direct funding & support. Plus of course the lenders used their deep pockets to influence governmental policy towards removal or reduction of programs which did allow students to go to college without selling their future economic life (and soul) for student loans.

The US student educational funding system is toxic, and largely benefits the lending cabal, there is a reason that most other developed countries do not use our model. To use an unpleasant ststement about the situation just because one has economic and educational syphillis and has become used to it doesn't mean it is healthy.

And as far as choice, well the current US educational funding system generally leaves students one choice, how much debt rope they will hang themselves upon.

9. disgusted2 - September 19, 2010 at 12:20 am

The very CORE of allowing individuals to dismiss the dastardly outrageous student loan debts via bankruptcy is so well stated by
atana09 with the following:

A) One trick was to provide promotional and support materials which implied that the institution and the lending entity were one body, or so closely associated with that lender that it left the impression amongst students that there were no alternatives.

B) The debt for education model provided a bizarre condition wherein the operative costs of college were transferred onto students and families and so the consequences became out of sight out of mind. A result was for academe and through government it led to low levels of direct funding & support.

Lastly, most individuals who have obtained student loans in completing college educations some are unemployed or under employed. These private lending institutions have all kinds of loan programs that are sanctioned by the college/universities who encourage students to use them indicating that they have a partnership with these lenders.

whm3113 your statement:
Some students and parents are borrowing much more than they should for a college education. Often this is happening because they are making decisions based on emotion rather than logic.

One never knows how much tuition will increase or when the financial circumstances will change in a household!

10. apples4apples - September 19, 2010 at 12:25 am

The private student loan companies should be applauded for their brilliant business plan.
They were able to convince Congress to pass a bill in 2005 that made all private student loans nondischargeable in bankruptcy, essentially giving them the power to target some of the most naive borrowers (students), to let these students borrow as much unsecured, uncertified debt as they desire, with no requirements to guide and monitor how the young students allocate the fund distribution. The students can then never get rid of this debt.

"Private student loans...the new credit cards from hell. Just sign in blood on the dotted line." Is it any surprise that the national student loan debt now surpasses that of credit card debt? $850 billion...

I am a young working mother who experienced an unexpected twist of fate after college, and I am now living at the mercy of relentless private student loan companies, to whom I owe for my undergraduate student loans, in addition to my Federal student loans. To make matters worse, my Father (who cosigned on my private student loans) is now in danger of losing his home as he nears retirement. I feel that I was the victim of aggressive predatory lending, the old “bait and switch trick,” and the solicitation of loans products that were designed to fail. For example, while I was in school, I periodically received phone calls and emails from my private student loan companies, to inquire whether I needed any more money for college. I was able to borrow up to $40,000 per year from each company. These funds were dispersed without any school certification, and they went directly to me to be used for, broadly, "the cost of education." I was told that after graduation, I would be able to consolidate my loans over 30 years, thus lowering my monthly payments, and making them affordable. However, to my surprise, after graduation, I learned that consolidation loans were no longer available. In addition, I feel that these loans were designed to fail. I earn a decent salary and so does my Father. However, we still cannot afford to make our monthly payments on these loans, and they are currently in default. When I took on these loans, I was naive and inexperienced. I trusted the system and the representatives who sold me these loans. I had no idea that they would lead me and my Father to ruin

I have been desperately following H.R. 5043 (Cohen and S. 3219 (Durbin): The Private Student Loan Bankruptcy Fairness Act of 2010, and the Fairness for Struggling Students Act of 2010, in hopes that there will be some relief in sight. I implore you to please support this legislation that will restore fairness and bankruptcy protection for private student loan borrowers. These bills would treat private student loans like similar forms of unsecured consumer debt in bankruptcy, which I feel is what they are. These bills would restore private student loans to their pre-2005 legislation status. They would force lenders to practice discretion when lending to students. As it stands now, I feel that students are naively taking out these loans, which can be used for any expenditures under the umbrella of “educational expenses.” Students are then locked into this high interest debt for life, and unlike other unsecured debt, they have no protection and no way out. Opponents of these bills claim that it would make student loans harder to obtain and allow students to abuse the system. However, there is no evidence of such problems before the bankruptcy protections were removed in 2005. To the contrary, lenders were making huge profits.

Hearing on this bill and stat facts:
http://judiciary.house.gov/hearings/printers/111th/111-91_56069.PDF

Please support future legislation by easily contacting your Congressman here:
http://projectonstudentdebt.org/letter_view.php?idx=21

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