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New Legislation Would Discharge Private Student Loan Debt In Bankruptcy

May 2, 2012

DebtA number of lawmakers are pushing for legislation that would allow for bankruptcy to discharge private student loan debt.

Currently, there is no way for borrowers to escape repayment of student loans. The bankruptcy laws were written as such to protect lenders, who were concerned that young graduates, who often have few assets, could too easily walk away from their loan obligations.

But that thinking has changed as student debt has surged, at the same time that college graduates' salaries have declined. As reported by The Wall Street Journal, the average debt load of all new graduates increased 24 percent from the years 2000 through 2010, to $16,932, according to the Washington, DC-based Progressive Policy Institute. Meanwhile, earnings of full-time workers ages 25 to 34 with just bachelor's degrees fell by 15 percent during that same time, to $53,539.

Recently, Senator Dick Durban of Illinois, a Democrat, introduced legislation that would make it easier for those who declare bankruptcy to shed private student loans. The catch, however, is that the legislation, called the Fairness for Struggling Students Act, would not apply to federal student loans, which account for the vast majority of student borrowing.

"It's clear that too many students have been steered into loans that they will not be able to repay and that they will never be able to escape," noted Durban at a U.S. Senate judiciary subcommittee hearing in Washington last month, as reported by the Chicago Tribune. "While the overall growth in student indebtedness is troubling, the most pressing concern is private student loans. Private student loans are a riskier way to pay for an education than federal loans."

It is true that private student loans typically have higher interest rates than federal loans. Moreover, government loans offer income-based repayment plans and forbearance during times of economic hardship, making them a much safer bet.

Many consumer advocates have come out in favor of Durban's bill, which they say will force private lenders to work out better terms for borrowers who run into trouble. Bankruptcy lawyers are also pushing for the legislation, because it could create new business for them.

But others have expressed concern that the bill would allow students to run away from their obligations, and might even force lenders to charge even higher rates because of their increased risk of losses.

"Students might be more apt to take such loans if they think that they will be able to unload their debt without repaying it," said Neal McCluskey, associate director for the Cato Institute's Center for Educational Freedom, who was quoted by the Chicago Tribune.

According to the Associated Press, Treasury Secretary Timothy Geithner recently told Durban that the legislation had "some merit" and that the Obama administration wished to work with him to help expand protections for private student loans. But the AP also noted that it was unlikely that the legislation would pass.


Compiled by Yaffa Klugerman

Sources:

"Even After Bankruptcy, Trapped By Student Debt," ajc.com, April 25, 2012, Justin Pope

"Student Loan Debt a Growing Threat to the Economy," chicagotribune.com, April 12, 2012, Becky Yerak

"Trying to Shed Student Debt," online.wsj.com, April 27, 2012, Josh Mitchell

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