student loans

Support Making Private Student Loan Debt Dischargeable in Bankruptcy

The average debt load per student loan borrower is now $24,301.  37 million people live with student loans. 15% of student loans apparently are from private banks and lenders.  Three Senators have now introduced legislation to make private student loan debt dischargeable in bankruptcy.  The bill below undoes a change in law from 2005 making private student loan debt nondischargeable

The full text of the very short bill is available on govtrak here.

The Press Release from Senators Durbin, Harkin, and Franken is reproduced below.


Durbin, Harkin, Franken and others say it's time to restore transparency, fairness and common sense to student loan process

[WASHINGTON, D.C.] – U.S. Senator Dick Durbin (D-IL) joined Chairman of the Senate Health, Education, Labor and Pensions Committee U.S. Senator Tom Harkin (D-IA) and U.S. Senator Al Franken (D-MN) in reintroducing two pieces of legislation – the Fairness for Struggling Students Act of 2013 and the Know Before You Owe Act of 2013 – to restore transparency, fairness and common sense to the student loan process.

According to the Consumer Financial Protection Bureau, the student loan debt among college students surpassed $1 trillion last year.  This reflects an average debt load of $24,301 for each of the 37 million student borrowers in the United States, according to the New York Federal Reserve Bank.  The CFPB reports that approximately $150 billion of outstanding student loan debt is in private loans.

“The first two pieces of legislation I will introduce this Congress deal with what I think is one of the biggest threats to millions of working families – the growing student loan debt crisis,” said Durbin. “Too many Americans are carrying around mortgage-sized student loan debt that forces them to put off major life decisions like buying a home or starting a family.  It’s not only young people facing this crisis, it is parents, siblings and even grandparents who co-signed private loans long ago and are still making payments decades later.  It’s time for action.  We can no longer sit by while this student debt bomb keeps ticking.”

“Unless we take action to educate and protect borrowers, student loan debt will be the next mortgage crisis.  Young Americans are being hamstrung by record debt levels, forcing them to delay other important investments in their futures, including purchasing homes and saving for a secure retirement.  By empowering students with clear guidance about their federal financial aid options before they turn to more expensive private loans and restoring the option to discharge private loan debt through bankruptcy, the Know Before You Owe Act and the Fairness for Struggling Students Act will go a long way to help students make smart choices and provide relief to borrowers.  Students need to know how to avoid the higher interest rates and less favorable terms of private loans, so they can be on more stable financial footing when they graduate,” Harkin said.

“Mounting student loan debt not only saps the ability of students in Minnesota and across the country to prosper after they graduate, but it is now becoming a real threat to our country's economic well-being,” said Sen. Franken, a member of the Senate Education Committee. “The average Minnesota student now graduates from college with more than $25,000 in debt, and large repayment costs for many years afterward stop them from being able to purchase homes, cars or other goods which fuel our economy. That is why I’ve been pushing for commonsense reforms to the student loan process since I joined the Senate. The cost of a college education shouldn’t bankrupt a family.  As our economy continues to recover, this legislation will help protect our students.”

The Fairness for Struggling Students Act of 2013 – also cosponsored by U.S. Senators Sheldon Whitehouse (D-RI) and Jack Reed (D-IL) – aims to restore fairness in student lending by treating privately issued student loans in bankruptcy the same as other types of private debt.  Since 1978, government issued or guaranteed student loans have been treated as nondischargeable during bankruptcy in order to safeguard federal investments in higher education.  In 2005, the law was unjustifiably changed to give private student loans the same privileged bankruptcy treatment as government loans, even though private student loans have vastly different terms and fewer consumer protections.  Today’s bill would restore the bankruptcy law, as it pertains to private student loans, to the language that was in place before 2005 so that privately issued student loans will once again be dischargeable in bankruptcy like nearly all other forms of private debt.

“A basic principle of our country is a fresh start for those who get in over their heads with debt, if they’re willing to face the rigors of bankruptcy,” said Senator Whitehouse.  “Even this is denied for those drowning in private student loans, as the result of a provision snuck into the 2005 bankruptcy reform legislation in the dead of night.  This bill gives us the chance to right that wrong.”

“Private student loans should be treated the same as other private debt in bankruptcy proceedings. This legislation would restore limited bankruptcy protection and send an important message to lenders and students that they need to be responsible,” said Senator Jack Reed.  “Getting a higher education is essential today and I will continue working to help make college more affordable.  This bill will give student borrowers who are struggling more options to meet their financial obligations and get back on their feet.”

The Know Before You Owe Act of 2013 would require schools to counsel students before they sign on to expensive, even unnecessary, private student loan debt and inform them if they have any untapped federal student aid eligibility.  It would also require the prospective borrower’s school to confirm the student’s enrollment status, cost of attendance and estimated federal financial aid assistance before the private student loan is approved.

There are several stark differences between private student loans and federal student loans. Federal student loans have fixed interest rates and offer an array of consumer protections and favorable terms, including deferment and forbearance in times of economic hardship, as well as manageable repayment options, such as the Income-Based Repayment and Public Service Loan Forgiveness programs.

In contrast, private student loans involve only private profit and often resemble credit cards rather than financial aid with uncapped variable interest rates (which spiked as high as 18% in recent years), hefty origination fees and few, if any, consumer protections.  Private student loans are ineligible for federal forgiveness, cancellation or repayment programs.

There are very few types of debts that the bankruptcy law subjects to a different standard, allowing for discharge in only the most extreme circumstances.  For example, the bankruptcy code makes it especially difficult for people to discharge child support responsibilities, overdue taxes, and criminal fines.  Privately issued student loans should not be on that list.

Should Private Student Loans be Non-Dischargeable?

Should student loans issued by private for-profit lenders be eligible to be discharged under the Bankruptcy Code?  Rep. Steve Cohen (D-Tenn.) just introduced H.R. 2028, the "Private Student Loan Bankruptcy Fairness Act," which would allow private education loan debts to once again be erased in bankruptcy just like other types of debts.

The full text of the bill is here.

Questioning Student Debt

The Washington Post reports that nearly 30% of college students who took out educational loans dropped out of college.  Those who leave school early are then four times more likely to fall behind on their educational debt obligation.  This is occurring against the backdrop of student debt now exceeding $1 trillion.  

Because student loans are (practically) non-dischargeable in bankruptcy, these facts further highlight the debt and bankruptcy complications we are likely to soon encounter from such a high level of non-dischargeable debt.

Student Loan Debt Grows

I am continually amazed at the growing crisis of student loan debt.  Government backed and private student loans are not dischargeable in bankruptcy except under the most extreme circumstances.  The following is an excerpt from a news summary by the American Bankruptcy Institute.

The Federal Reserve Bank of New York reported today that debt from educational loans in the U.S. rose 3.4 percent to $904 billion in the first quarter, Bloomberg News reported. Outstanding student debt increased from $874 billion three months earlier, the New York Fed said in the report. ...Ninety-day delinquency rates for student loans increased to 8.69 percent from 6.13 percent in the first quarter of 2003, higher than that of mortgages, auto loans and home equity lines of c redit, the New York Fed said.


Student Loan Interest Rates

The high balances students are incurring on student loans, coupled with the fact one cannot discharge student loans in bankruptcy, presents one of the greatest challenges for the next generation.  We now face a 3% increase in student loan interest rates.  The ABI and the Washington Post now report the following:

The Senate held two votes yesterday on measures to ensure that student loan rates do not double in July—and the issue remained exactly where it began: stuck, The Washington Post reported yesterday. The measures each failed to reach the 60-vote threshold necessary to move forward, as the parties remain at loggerheads over how to pay for the $6 billion loan subsidy. If unresolved, loan rates will rise from 3.4 to 6.8 percent on July 1. Leaders in both parties have said they want to freeze rates for another year. Democrats have proposed paying for the additional year of loan subsidies by ending a tax provision that allows executives of some small businesses to collect some of their income as business profits instead of wages. On a 51-43 vote, the measure failed to advance. The Republican proposal would have paid for the loan-rate freeze by eliminating the preventative health care fund created in the 2010 health care act. The White House has said Obama would veto that bill, but it failed to move ahead in the Senate on a 34-62 vote.

Student Loan Debt Great Threat to Economy

Mounting student debt loads (and the non-dischargeability of such debt in bankruptcy) is a great threat to the economy and will devastate many individuals and families when it cannot be repaid.

See the Seattle Times article here.

Outstanding Student Loans Exceed $1 Trillion

Excellent post on impact of non-dischargeable student loan debt which now exceeds $1 trillion in outstanding loans.
The problem ahead lies in the economic impact these loans will make on the rest of the economy. New car sales, home sales and other life-cycle events will be delayed as borrowers work to pay off these non-dischargeable loans.