Private Student Loans Should be Dischargeable in Bankruptcy Courts, Senator Says

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.

Comments

[Tia Bullen]

I graduated from college in 2009 with a Bacchelors Degree in Science, Nursing. The economy was come truly collapsed due to the housing market crash and prior Bail out issues which not only made it almost impossible to finish school but also left my family in a bad rut as the state of California was sinking fast. As a result I returned home from college to find my family homeless and struggling and no new RN grad opportunities available. I applied for forbearance on my private loans as I was not employed as an RN and could not afford the $1500+ monthly payment sallie Mae was demanding. As a result I now have $50K of capitalized interest on my loans. My interest only payment is around $1700 per month and I cannot afford to pay sallie Mae as well as my other lenders. I am receiving telephone calls and correspondence daily because I cannot afford my payments. HELP. I am behind in my taxes $17,000 from claiming exempt jus to pay my student loans for one year. I love my job as a RN and cannot afford a place to live. I have spoken with attorneys to no avail and don't what else to do.

[RFT]

I spent many years working on earning a BS degree whils rasing a family. I got my degree in 1995 worked for a couple of years then went to law school. Before I went to law school in 1997 I was earning $40,000/yr. Now after accumulating over $100,000 of student loan debt and practicing law for 12 years I am earning $40,000/yr (because the banks crashed the economy) with a student loan payment of over $1,200/mo of which $900 is interest. I filed bankruptcy last year but couldn't discharge any of this student loan debt. I am 58 and have no chance of ever paying this debt before I can't work any longer or die of old age. I am sorry I served this country in the armed forces. At that time I thought it was a great country "of the people, by the people, and for the people". I have since learned it is a country of the rich, by the rich and for the rich who's greed has no bounds.

[Michael Hamacher]

I just found out that the 824.00+ that I pay Sallie Mae monthly is interest only and nothing going to principal. How wonderful that they can keep me enslaved knowing there is no chance of discharge with bankruptcy.

I guess I should be grateful that I can go to work everyday, help save lives and know that my income goes to student loans intrest for their profit. I think that there should be a list of all those that voted for the 2005 law posted on the internet. Then everyone would easily know who to thank. I imagine many would be suprised to find out they just voted to send back to congress one of these scoundrels.

[orlando health insurance]

Unfortunately, rates for federal student education loans are about to double.

[tara thompson]

I was paying on my private student loans and decided I had to declare bankruptcy if I was going to be able to pay federal and private student loans. This caused my private loans to go into automatic.default and sent to collections. I was paying...this is unjust. Now they want lump sum that I don't have. Cannot find proper legal advice either.

[Debt Help]

I completely agree with this. As a recent college grad, who is employed I still cannot pay the minimum of $900.00 a month, when I make under that in a month. I thought going to college meant getting a job that paid well? My loans have forced me to get debt help in order to pay them off in a timely manner.

[Marc Williams]

I am 100% service connected unemployable with the VA. I have an 10 year old private student loan that I owe %80K. If it were a govn. backed loan it would be forgiven, but since it's private they want blood. Since its in default, I can't even get a VA home loan! THIS IS DISCRIMINATION AGAIN THE VETERANS!

[ALS]

I am able to manage my goverment owned student loans. The issue is my private student loan debt. These people would not work with me before I defaulted, and will not work with me now that I have. I paid as much as I could when ever I could and now I don't know where to send the money at all. It really is sad the fact that they defaulted me even though I gave them some money. It's not like I was shrinking away and saying I won't pay them. My debt is 100,000 dollars and the only job I could get was in retail. These loans are owning my life, and whats worse is they won't even work with me so I can give them money. If the laws were re-instated, I belive that these loan companies would work with me and others like me. And if they didn't work with people in my situation, we would be able to get on with our lives and not be stuck in this cycle.

[cash loans online]

It's not fair that people can discharge private credit card debt but individuals who take out FEDERAL loans to get a college education have no similar recourse. Again, this is not THE answer to THE problem--but it would provide a lot more relief to more folks than a one-year extension of a 3.4% interest rate. I also think that the ability to declare bankruptcy for all student loans, FEDERAL loans especially (since they make up 85% of the market), would result in bringing college costs down to earth because the government when they loan money would think twice about a borrower who may not be able to pay it back. Skyrocketing tuition would be eliminated because the easy money would be gone.

[Vijay]

Good question and you are the only one who can ansewr it. The reasonable amount of debt to assume to attend college depends on your plans for repayment of that debt. For example, if you plan to work in the peace corp for years after you graduate, you probably wouldn't like to have to be making loan repayments. However, if you know that your grandparents have left a trust for you and you have full access to those funds once you turn 25, then you might be willing to borrow as much as the trust is worth. FYI the average student debt upon graduation is running around $20,000 for a 4 year degree. Your question asks about interest if you mean what's a reasonable interest rate, you should have to pay much higher than 8% as a student. As an aside, there are a couple of professions which qualify for college debt reduction, eg if you are a teacher in certain inner city schools.

[Buck Batard]

There are American students who are leaving the US now because of students loans that they can never pay back because of egregious loans that have all sorts of traps in them. We cannot allow our young people to leave the US to go elsewhere to seek their fortunes, having been denied that opportunity here. Perhaps there should be some limitations on what is dischargeable, but many schools preyed on students with many online schools offering degrees which could never provide any job that would allow the students to pay back their loans. There are tens of thousands of examples of horrendous fact situations that are almost unbelievable. We let our nonproductive financial sector become totally out of control and now we need to rectify the lack of controls on that industry by allowing students a remedy for egregious loans that never should have been made. There are many companies that offered so called offered educational opportunities that were nothing but scams and fraud and those persons defrauded should have some sort of remedy to alleviate their economic plight other than having to leave the country. Many of those institutions have been banned from participating in the loan programs and have gone defunct, but there were some education companies that had default rates that were far in excess of 50% of the student population. Deregulation failed our society and we must remedy that failure.

[Daniel]

since you dont make alot of money, the thing you will have to do is try to find ways to save as much of it as you can.Do you eat lunch AT work? If so maybe you can take your lunch a couple of days turn your heat/airconditioning down or off while you are at work for 8 or so hours per day.do you have thigns in your house that you dont use? maybe you can sell them on ebayYou might qualify for the earned income credit when you file your tax return, maybe you can devote that ENTIRE amount to repaying you debt.Not sure what you took up in school but there are certain programs that will forgive your loans if you agree towork with them peace corps, certain teaching positions etcmaybe you can go back to your school and talk with your guidance counselors regarding this .When you go to the store to purchase groceries, GO with a list.Do you have a friend that you could split a membership with to one of those discount clubs if so you can buy toliet paper and other supplies in bulk and for even more savings you can split the cost of same with your friend.wash full loads of clothing only.I am sure you will be able to think of other thigns you can doBest of luck to you

[SBA Loans]

well, this is quite disturbing for the high school students and if the prices and interest rate of students debt gets anymore higher then there will be very less amount of students that will become graduates. because they might start to ignore the worth of graduation degree because of the amount of the debt they have to pay after getting that degree.

~Aansy Stone

[MIndy K]

I support Durbin 100%. I watched... literally watched these predatory lending practices unfold post 2005. Some greedy little fat man banker somewhere had this super idea to treat private student loans just like alimony and child support...and banks all over the country salivated. I can't even get a lawyer to take my bankruptcy case involving private student loans and was informed that the washington fat cats protect this law religiously attacking even those with foolproof legitimate reasons to have their student loans removed because heaven forbid they set a precedence for everyone else. I've seen loan rates as high as 14%, no IBR, limited deferment, paid forbearance, purposefully lost paperwork with sensitive information on it, and with over $100,000 already in debt the offers to give us more money kept pouring in. We owe over $270,000 collected in less than 7 years. If I could pay monthly payments would be 3x my monthly mortgage payment. Not only that buy my husband will never use the education. It's disgusting. Had this been a business loss or a private loan we'd be fine. Stamp it with Student and we'll be taking this debt to our graves at this rate.

[Chloe]

Unfortunately, interest rates for federal student loans are about to double. Considering some students (especially those who are in graduate programs) have more than $100k in debt, this is a big concern.

[Kimberly A. Campbell]

Millionaire members of Congress that haven't earned their pay in 2011, a president that takes a heck of a lot of vacations and golf course excursions - but the stickler really is the foreign students brought here on our dime that are earning a free 100% paid in full education with no expectation of paying it back.

Sorry - no deal.

Bankruptcy will ruin the identities of hundreds of thousands of students that had good credit all of their lives and shouldn't be forced to relinquish that because of bad handling of federal financial aid by the private schools that drew them in under false pretenses.

Moreover, United States citizens take priority over foreign students that are not required to pay.

Jubilee for all US students that cannot pay back their loans.

We excuse homeowners. We can excuse our excellent students that earned degrees.

We reward excellence.

[Alan Collinge]

G Marcus Cole is a corrupted, academic elitist, the likes of which have brought entire countries (like Finland) down by talking out of the sides of their necks in a "truthy" fashion.