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January 25, 2013 3:35 PM Senators Introduce Legislation to Address Private Student Loans

By Daniel Luzer

Three Democratic senators introduced legislation earlier this week to allow people to discharge student loans in bankruptcy. According to an article at Campus Progress:

[Illinois Senator Dick] Durbin introduced the Fairness for Struggling Students Act, which would move the country back to pre-2005 standards and allow private student loans to be discharged in bankruptcy like any other loan. Federal student loans have been ineligible for bankruptcy discharge since the 1970s, but only since 2005 have private loans had the same status—and, Durbin said, private lenders and for-profit colleges are offering students the rawest deals.
“Charles Dickens would have a ball” with the current debtors’ prison-like standards for private student loan bankruptcy protection said Durbin. Right now, a borrower has to show “certainty of hopelessness,” or prove that the future is likely to be as bad as the present, to qualify for an “undue hardship” exception to discharge student loans. Since the borrower must prove a negative, her only “certainty” is the hopelessness of her case.

Durbin introduced a similar piece of legislation, which went nowhere, in the last Congress.

This one, frankly, will probably go nowhere as well. But then, it probably wouldn’t matter much even if it did become law. Attempting to fix the student loan problem by allowing debtors to discharge private loans in bankruptcy is sort of like trying to reduce credit card debt by adjusting the interest rate on the Diners Club card.

While private student loans, which often carry high rates of interest, are perhaps the most unjust example of the burden of education debt, they’re actually a pretty small part of the problem.

Only 15 percent of the Americans’ roughly $1 trillion in education debt is owed to private lenders. The rest of it, some 85 percent, is owed to the federal government.

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer

Comments

  • electedface on January 30, 2013 1:59 PM:

    Student debt is stunting the growth of the economy. Student loans have increased by 500% over past decade. As the next generation graduates from college, they are plagued by insurmountable debt that places demands on their income, limiting their ability to spend their earnings in ways that stimulate the economy.

  • BlondeWahine on May 28, 2013 9:54 AM:

    I agree that private student loan debt should not be protected under the bankruptcy law the same as federal student loans, because they don't play by the same rules.

    HOWEVER, what the legislatures should REALLY be focusing on is getting the private lenders to play by the same rules. These lenders should offer the same repayment plan options that are available to federal student loan borrowers. This would still hold borrowers accountable, but allow them to arrange for financially feasible payments so they aren't left in collections or completely destitute from trying to keep up with the high payments of a private student loan.

    My husband took out a couple of private student loans not fully realizing the exorbitant finance charges he would incur (anywhere from $10k-$20k)...MUCH more than the actual loan itself. It wasn't until repayment that we truly realized this, and now we struggle to pay back the debt. It's not that we don't want to pay what we owe - we just really struggle with the high payments, and want some payment options that will work with our financial situation that makes paying our debt feasible.