Allow Private Education Loan Debts to Be Erased in Bankruptcy
Struggling borrowers should be able to discharge their private student
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.
[Check out U.S. News Weekly, an insider's guide to politics.]
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.