Lawmakers Taking the Fight to Private Student Loans During Bankruptcy

In an effort to curtail ever increasing student loan debt, two separate Bills have been introduced in both the Senate and House of Representatives. Respectively, the Fairness for Struggling Students Act of 2011 and the Private Student Loan Bankruptcy Fairness Act of 2011 would restore students’ ability to discharge private student loans during bankruptcy proceedings. 

Prior to 2005, only government student loans, not private student loans, received bankruptcy protection. The Bankruptcy Reform Act, (passed in 2005), eliminated the ability to discharge these private loans, absent a showing of undue hardship; a difficult standard to prove. This reformation, it seems, is not without a sense of irony, since, by comparison, mortgages, credit card balances, and even gambling debts remain dischargeable without a showing of undue hardship. By passage of the proposed legislation, Lawmakers intend to provide a means for students to pursue higher education without the worry of financial distress.

In recent years, students in higher education have been forced to turn to private loans to afford school; notably for-profit institutions. Unfortunately, such loans include cumbersome fees and interest rates. In addition, private student loans do not receive government-imposed protections and limitations; for example, caps on interest rates, flexible repayment options, and limited cancellation rights.  The proposed legislation would require students to repay federally-subsidized loans, but, private loans would be expunged. 

Antagonists argue that such legislation would increase bankruptcy filings.  Further, private student loan companies maintain that a discharge of private loans will increase costs and interest rates limiting qualified loan seekers. In defense, supporters contend that the ill effects of bankruptcy would remain a deterrent and that the protections would encourage lenders to offer more reasonable repayment options and dissuade institutions from increasing tuition costs.

Today, there exists a generation of Americans who fail to pursue higher education for fear of being hamstrung by student debts. This proposed legislation intends to assuage these fears by providing a true “fresh start” through bankruptcy for those students in need.

Editor's Note: Lynette Baker is a spokeswoman for RethinkingDebt.org, a nonprofit offering financial advice and credit counseling with offices in Hauppauge.