House Hearing Shines Light on Student Bankruptcy Injustice

Earlier this week the House held a hearing on private student loans and bankruptcy, shedding light for the first time on a rather unknown yet devastating aspect of student debt.

Did you know that because of legislation dating back to 1976 under the Higher Education Act private student loans are unable to be discharged through bankruptcy? In other words, feel free to run up the credit card and splurge, but take out loans to pay for education? That’s just reckless.

The number of students taking out private (or nonfederal) student loans has increased significantly over the past decade. Private student loans now make up nearly a quarter of the overall market, compared to just ten years ago when they made up a small fraction. This spike is not only due to skyrocketing tuition –the average four-year tuition has increased 30 percent from a decade ago –but also because of the complexity of the financial aid process that leaves many students vulnerable to take out the worst of loans. In fact, many students turn to private loans before even exhausting available federal aid and loan options.

Source: College Board

Meanwhile, private lenders capitalize on this confusion, even at times in cahoots with universities, preying on young adults, steering them towards more risky loans.

These loans pawned on students by private lenders are often downright predatory, offering little consumer protections. Private loan interest rates are normally variable, with average interest rates running between 9 and 13 percent, nearly double that of federal loans. On top of that, the flexibility of repayment for private loans are much less pliant, in almost all cases a missed monthly payment results in an automatic interest rate hike of 2 percent, with additional fines and fees to punish borrowers.

And you can imagine that with the toughest job market in decades, coupled with staggering student debt averaging $23,000, students are finding they can no longer keep up with repayment. But unlike federal loans, private lenders do not have to offer flexible payment plans or a forbearance option to struggling borrowers. Why should lenders? When they can maintain hefty profits.

While in truly tough times, students needing to discharge their private loans in bankruptcy are forbidden to. In other words, if you face chronic unemployment, a medical emergency or even die –tough luck, student loan debt will continue to be an albatross.

Congress though may finally be addressing this injustice. This week’s hearing was the first time the issue has been addressed since written into law in 1976! Rep. Steve Cohen (D-TN) announced he will soon file legislation to give private student loan borrowers more equitable treatment during the bankruptcy process. And in another good sign, House Chairman of Education and Labor Committee, Rep. George Miller is on board as well, stating, "There’s no justifiable reason that the lenders who provide them should be treated any differently than credit card companies, auto finance companies, utility providers, and other creditors.”

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