Relief for Student Debtors

 

Published: August 26, 2011

 

Since the start of the recession, record numbers of Americans have enrolled in college in search of new skills that would improve their employment prospects. Unfortunately, far too many students enrolled in expensive for-profit schools end up dogged by ruinous debts, with little in the way of skills or credentials to show for their efforts.

The schools sometimes push these students into high-cost private loans that they can never hope to repay, even when they are eligible for affordable federal loans. Because the private loans have fewer consumer accommodations like hardship deferments, the borrowers often have little choice but to default.

Worse yet, these loans and the bad credit history follow the debtors for the rest of their lives. Even filing for bankruptcy doesn’t clean the slate.

Legislation is pending in both houses of Congress that would make private school loans dischargeable through bankruptcy, as most of them were before Congress changed the law in 2005. It had long been the case that federally backed student loans were protected during bankruptcy proceedings. That is reasonable, since those loans were backed by taxpayer dollars and flexibly structured so that borrowers could receive deferment in tough times and resume payments when their finances improved.

The country has a compelling interest in making it as difficult as possible for student borrowers to elude payment for federal loans. There was no reason for extending that protection to private lenders of student loans.

For starters, that gives these lenders, who often turn a huge profit, an undeserved advantage over credit card issuers, gambling casinos and other issuers of unsecured credit whose debts are still subject to discharge in bankruptcy. The change also encouraged reckless underwriting by lenders, who no longer felt compelled to determine the borrower’s ability to pay. And it led to financial catastrophe for students who were duped into signing up for pricey private loans.

Bills sponsored by Senator Dick Durbin, Democrat of Illinois, and Representative Steve Cohen, Democrat of Tennessee, would eliminate the unfair protections for private student lenders and give struggling borrowers a chance at a fresh start.