A Gaping Hole
"Folks who borrow private students loans are trying to better their lives. They certainly shouldn't be treated more harshly than those who rack up credit card debt at the mall."
Higher Ed Watch
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"Folks who borrow private students loans are trying to better their lives. They certainly shouldn't be treated more harshly than those who rack up credit card debt at the mall."
Higher Ed Watch
The leaders of the House Committee on Education and Labor introduced legislation on Friday that would go a long way in addressing consumer advocates' biggest concerns regarding private student loans. The Higher Education Act reauthorization bill would, for instance, bar colleges and lenders from making deals in which institutions of higher education directly profit from their students’ private loan debt. The measure would also ban lenders from branding private loan products with a college’s name or logo in a way that implies that the school has endorsed the loan.
In addition, the legislation would increase transparency in the private student loan market. Lenders would be required to provide clearer information about the interest rates and fees they charge and to inform potential applicants about the availability of cheaper, safer federal loans. Borrowers would have up to 30 days, after a private loan offer is made, to decide whether or not they want to take out the loan, and another 3 days, after the loan is consummated, to cancel it. And the measure would bar lenders from penalizing borrowers who pay off their high cost private loans early. All good.
Still, the bill has at least one big, gaping hole in its approach to private student loans: it doesn’t provide relief for borrowers who have taken on unmanageable levels of private student loan debt and now find themselves in severe financial distress. To address this oversight, we at Higher Ed Watch believe House Members can and should add a provision to treat private student loans the same as other forms of consumer debt when it comes to bankruptcy claims.
As we have noted previously, Congress in 2005 tucked a provision into its infamous bankruptcy bill making it virtually impossible for borrowers to discharge private student loans. That special provision was added in a secret conference committee, without any public debate and with no named Congressional sponsor.
To be clear, we're not advocating allowing borrowers to claim bankruptcy willy nilly in order to avoid student loan repayment. Our view though is that private student loans should not be treated any differently from other forms of consumer debt when it comes to bankruptcy. Right now they are, and that's wrong. Folks who borrow private students loans are trying to better their lives. They certainly shouldn't be treated more harshly than those who rack up credit card debt at the mall.
For most unsecured debt, a borrower who runs into difficulty can file for Chapter 7 liquidation or Chapter 13 reorganization, so a judge can sort out the appropriate treatment of various loans. But there is a short list of debts that the law subjects to a different status, allowing discharge in only the most extreme circumstances. The government, for example, makes it especially difficult for people to escape child support responsibilities, overdue taxes, and criminal fines.
Federal student loans also can't be discharged. There is at least some justification for providing federal student loans that status, since they are backed by taxpayer dollars and come with borrower protections in cases of economic hardship, unemployment, death and disability. But there is no good reason for private student loans to be accorded the harshest bankruptcy status given to criminal fines, child support, and back taxes.
Shielding private loans from bankruptcy in almost all circumstances means that repayment demands extend essentially forever, leaving even the most destitute borrowers with no way out. And bankruptcy exemption makes private student loan providers less cautious about peddling high cost loans to students who might never be able to afford them. In other words, it promotes reckless subprime lending, which as we have seen in the mortgage industry, is fraught with danger. Treating private student loans like other forms of unsecured debt would at least cause lenders to think twice before providing high-interest loans to people who they know will have trouble paying them back.
The House Education and Labor Committee is expected to debate and approve the Higher Education Act reauthorization legislation this week. The bill is then likely to go to the House floor for a vote within the next month before Congress adjourns for the winter holidays. We are hopeful that on House floor, Education and Judiciary Committee leaders will recognize the need to eliminate the bankruptcy exemption for private student loans.
Perhaps the easiest course of action would be for House leaders to embrace legislation that Sen. Richard Durbin (D-IL) introduced in the Senate that would reverse the 2005 bankruptcy statute for private student loans and allow borrowers to discharge their debts after attempting to repay them for five years. But the latest version of Mr. Durbin's bill makes the suggested change only for new borrowers. That's not good enough. We shouldn't abandon those already in severe financial distress. They need help now.
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Can you point us to these subprime lenders?
NAF, where are these subprime lenders? Can you point us to them? Isn't this more innuendo? All private loan securitizations I've seen have average FICOs in excess of 700. I thought subprime lending was generally considered to be to borrowers with FICOs below 660? Doesn't the average have to be below 660 to be considered a subprime lender? Non-dischargeability has been around for years in one form or another so if your supposition is correct you should be able to point us to the subprime lenders in the private student loan space. Well NAF, where are they?
The reason the bankruptcy protection exists for both federal and private loans is so that borrowers have a clear incentive not to borrow large unsecured sums frivolously. It isn't so that lenders have an incentive to throw money at poor credits. These aren't credit cards where the average debt is $8,000 to $9,000. The average borrower is leaving school with $20K+ in federal loans, and probably a higher tally for private loans.
Your fear-mongering once again is not supported by fact.
Private Student Loans
The problem with the idea that private student loans being non-discharchable in bankruptcy will be an incentive to borrowers not to get in too deep is that once people like me find this out it is way too late! I am a victim of these financial institutions that are targeting college students with good credit. I was able to get $52,000 worth of loans over the internet never speaking to anyone. The terms were very unclear. I had no one to explain to me the devastating impact this would have on my life. By the time that these loans went into repayment status, I owed about $73,000.00. WOW!!! That is $20,000 worth of interest that they have racked up! My payment which I thought would be around $350 per month is over $700. There was no one to guide me and to explain what a libor rate is. I thought that my interest rate would be 4% and calculated like a regular federal student loan. I was so wrong and now my family is suffering because of this poor stupid choice that I made. My point is that because I had good credit, I was able to get myself way in over my head. Not even a credit card company would have let me get this much credit. Someone needs to take into account the age of the borrower. I was only 22 years old and had no idea what a life changing event this would be. I just knew I had to have some way to live while I finished my student teaching and observations that prevented me from working full time. Had I understood what these loans would do, I would have never taken them out!!!! This is how these private student loan companies are wrong and should be dischargeable in bankruptcy. Maybe that would be an incentive for them to fully explain the repercussions of their loans to young college students that have built up a good credit history. I am now ruined financially and am desperately and seeking some help. Someone needs to stop these private loan companies!!!!
Private student loans relief or discharged
Subprime Lending
There is more to subprime lending than FICO scores and it's happening in the private student loan industry. It's critical to look at the actual loans being made. Professor Kurt Eggert of Chapman Law School describes predatory lending as: the use by lenders of deceptive, manipulative, or coercive practices in order to induce borrowers to accept loans that (1) have interest rates or fees significantly above the current market rate given the risk profile of the borrowers or other terms significantly worse than the market norm offered by legitimate lenders, or (2) which leave the borrowers worse off than they would have been without any new loans, or (3) both.
Predatory practices occur in:
To say that there is no subprime or predatory lending in the private student loan business because the average FICO scores for these loans are higher than typical subprime borrowers proves nothing.
Further, even without subprime lending, student loan borrowers should have the same rights in bankruptcy as other consumers. Here are some key reasons: (note: these are arguments for restoring bankruptcy rights for government AND private student loan borrowers. We strongly advocate at a miniimum that these rights be restored first for private loan borrowers).
1. Accounts of alleged abuse of the bankruptcy system by student loan borrowers were never well substantiated. Regardless, the new bankruptcy rules are intended to curb abuse and preserve the bankruptcy safety net for those student loan debtors who truly need it.
2. Treating student loans differently in bankruptcy is based on the false assumption that higher education always leads to financial success.
3. It is unfair to debtors and creditors to treat student loans differently because student loans are easier to get than other forms of credit.
4. The consumer protections in the government loan programs are not a substitute for bankruptcy. These protections do not even exist for private student loans.
No Way Out
I am neither an attorney or an expert on higher education. I am, however, a former graduate student who found it personally necessary to claim a Chapter 13 bankruptcy in the early 1990's.
My petition was directly effected by the Leeper/Webster v PHEA decision (94-3372 & 94-3373) which allowed PHEAA to keep the interest running on my loan during the length of my plan. Consequently, none of my payments were applied to principal, and I am still many years from repaying a $20,000 student loan. I am interested in knowing if the proposed changes would provide someone like myself any relief?
Help
I am currently in repayment on four loans (two private and two government) that consume one third of my monthly income. Though I struggle to keep all my payments up, none of my loans are in default. When my payments came due I chose the extended payment plan on all of them. I owe more than $120,000 when you include my daughter's $30,00 in loans. My current salary is about $65,000 annually. Though I am able to meet all of my financial obligations each month there is practically nothing left at the end of the month.
I have sought relief by asking my school for partial debt relief, but was refused. The school I attended fired it's financial aid director for accepting under the table payments from a lender that equalled the cost of her graduate degree. It was suggested I leave the school after completing all but five credits needed for graduation. I took the position that since I was allowed to enter and begin coursework without the required GRE test exam, that the school should have accepted some of the risk for not following its own appliction rules. Now I am obliged to make payments for the next thirty years and unfortunately my situation is not covered by the new higher education act. I truly believe that an excellent credit history and a thirty year employed career played a large role in considering my apllication for enrollment and education funding.
I did not graduate and left with a certificate rather than a degree and I will end up paying much more for the certificate than it would have cost had that been my original goal. I am now nearly sixty years old and don't believe I'll be able to continue to pay for another twenty five or thirty years. I am willing to pay something for my poor judgement (I've benn making payments on the loans since 2004), and I expect to work for at least another seven years, but I don't see a way out of this dilemna without help from the government.
The bill that passed the Congress seems to only apply to people who have graduated, however not every student who enrolls in college completes all of the courwse work and the loss of future income is devastating. Our legislators need to take this population of college enrollees into mind when considering this nmatter of educational debt repayment.
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