Posted on December 28, 2012 08:40
Allow Private Education Loan Debts to Be Erased in Bankruptcy
Struggling borrowers should be able to discharge their private student loan debts
By STEVE COHEN
Steve Cohen is a Democratic representative from Tennessee.
Millions of Americans pursue college educations and training for new careers, which is good for them and for our nation. Yet these efforts are costly. This year, total student loan debt exceeded $1 trillion, more than any other kind of consumer debt. Debt from student loans issued by private for-profit lenders is troublesome. Unfortunately, current law prevents struggling borrowers from discharging their private student loan debts in bankruptcy like they can with other kinds of debt. This situation must change.
Private for-profit student loans often lack consumer protections. They typically have variable interest rates with no caps, exorbitant fees, and hidden charges. Also, many lenders use aggressive, high-pressure tactics to target vulnerable individuals, including young people without much financial experience. Private lenders are not required to—and often do not—provide the deferments, income-based repayment plans, cancellation rights, or loan forgiveness that are available to federal loan borrowers.
[Read John Hupalo: Discharging Private Student Loans Is Counterproductive]
Currently, educational debts survive bankruptcy unless the borrower can prove that repayment would impose an "undue hardship." To demonstrate this hardship, however, the borrower must pursue expensive legal action, entailing a full-blown trial. This presents a Catch-22 because it forces a borrower, already in financial distress, to spend thousands of dollars on attorney fees and expenses to prove "undue hardship." Meanwhile, private lenders have almost unlimited resources to litigate and little incentive to settle such disputes. Worse still, the "undue hardship" standard is vague and, as a result, courts have applied it inconsistently. Cumulatively, these factors effectively preclude borrowers from discharging private student loan debts.
Finally, there is no principled reason that for-profit lenders should enjoy special protection not given to other creditors. Under bankruptcy law, only certain debts cannot be discharged, such as spousal and child support, certain taxes, and debts incurred based on the debtor's fraud or other bad actions. These exemptions exist for principled policy reasons that don't apply to private student loans.
Also, private lenders do not deserve protection under the Bankruptcy Code because the "undue hardship" provision, first enacted in 1976, was intended to protect the taxpayer dollars that fund federal student loan programs. Yet Congress, in 2005, extended this protection to for-profit educational lenders, even though no taxpayer money was at stake.
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To address this problem, I introduced 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. This will help ensure that people can improve their lives through education without fear of financial ruin.
Opponents of my legislation claim that making private student loans dischargeable will result in higher interest rates. No evidence supports this claim, and it is telling that private loan interest rates have not decreased since 2005. If anything, private lenders have an incentive to make risky loans, knowing that they will not be discharged. By restoring bankruptcy dischargeability, my legislation will ensure that lenders only make prudent loans and will encourage private lenders to work with financially distressed borrowers to modify loan terms.
Current law unjustly punishes those who sought to improve their lives by getting an education but became victims of predatory lenders. My legislation corrects this injustice.