The congressional overhaul of bankruptcy laws in 2005 included a provision that students with private college loans can’t discharge those debts in bankruptcy courts, and now Sen. Dick Durbin (D-Ill.) wants to change that.
At a hearing on Capitol Hill today, Durbin said there is no reason why private student loans should be treated differently from other private debt in bankruptcy. “That means that students are stuck with these loans for life,” he says. He wants to restore law to pre-2005 standards.
“How in the world did that provision get into the law?” Durbin said. “It was a mystery amendment. We can’t find out who offered it.”
Durbin cited a report last month from the National Association of Consumer Bankruptcy Attorneys, “The Student Loan ‘Debt Bomb.’” The report pointed out that American student borrowing exceeded $100 billion in 2010, and total outstanding student loans exceeded $1 trillion last year.
There is now more student loan debt in this country than credit card debt, Durbin said, but the most pressing concern is private student loans, a far riskier way to pay for an education than federal loans. The most recent national data from the Project on Student Debt shows that 33 percent of bachelor’s degree recipients graduated with private loans, at an average loan amount of $12,550.
Federal student loans have fixed, affordable interest rates, Durbin said. They also have a variety of consumer protections, such as forbearance in times of economic hardship, and they offer manageable repayment options such as the income based repayment plan.
Private student loans, on the other hand, often have high, variable interest rates, hefty origination fees and a lack of repayment options, Durbin said. And private lenders have targeted low-income borrowers with some of the riskiest, highest-cost loans.
“There is no reason why private student loans should get treated differently from other private debt in bankruptcy,” Durbin said. “And it is especially egregious that these private loans are non-dischargeable in cases where a student was steered into the loan while the student was eligible for safer federal loans.”
A student who attended Harrington College of Design in Chicago, Danielle Jokela, shared her story of graduating with highest honors in interior design, and then learning the size of her loans. She says she now pays $830 monthly payment, and will probably pay around $211,000 for around $70,000 of student loans in the next 25 years. She can’t file bankruptcy, can’t negotiate settlement, can’t stop paying student loans, and doesn’t want her wages garnished.
“I’m out of options,” Jokela said.
G. Marcus Cole, a Stanford University law professor, said he was sympathetic with the plight of students trapped in huge debts, but was concerned about allowing loans to be discharged. Durbin’s legislation would raise the cost of student borrowing for all student loans, would dry up the entire student loan market, and reduce the affordability of such loans.
In student loans, the person is borrowing against their future capital, Cole said. “If you take away the exemption from discharge, you’re essentially saying to the lender that they can’t look at that future for sure,” he said. “That increases the risk premium that has to be charged across all loans.”
Durbin said he did not buy that argument. “If it really was so compelling, it wouldn’t be slipped in as it was here.”
Durbin said he is concerned with how student loans are helping drive the ballooning costs of higher education, and he used Georgetown Law School as an example. Georgetown now costs more than $50,000 per year: “To me that is just over the moon,” Durbin said.