Senators Introduce Legislation Offering Bankruptcy Relief for Private Student Loans
March 18, 2015

Borrowers often take on many different kinds of debt. However, student loans remain the most difficult to escape from. Only in certain exceptional circumstances, can a borrower expect to obtain relief. For most, student loans are nearly impossible to discharge – even if they file for bankruptcy.

Senators Propose Bankruptcy Relief Measures for Private Student Loans

The situation could soon undergo a transformation. Recently, a group of 13 senators introduced a bill that could supplement the measures announced by President Obama in his recent presidential memorandum i.e. the Student Aid Bill of Rights. Titled “Fairness for Struggling Students Act of 2015,” the bill aims to provide a resolution to the current student debt crisis. Among other things, it seeks to restore the bankruptcy code by treating private student loans in the same manner as other private unsecured debts.

Illinois Senator Dick Durban introduced the Act, while senators Sheldon Whitehouse (RI), Al Franken (MN), Richard Blumenthal (CT), Patty Murray (WA), Jack Reed (RI), Elizabeth Warren (MA), Ron Wyden (OR), Barbara Boxer (CA), Tim Kaine (VA), Brian Schatz (HI), Kirsten Gillibrand (NY) and Mazie Hirono (HI) co-sponsored it.

Rising Tuition and Fees to Blame for Student Loan Debt Crisis

National student loan debt amounts to over $1.2 trillion. With each passing year, this figure continues to grow. Reports highlight that the average borrower leaves school with a Bachelor’s degree and a student loan debt of about $29,000. Each successive class continues to surpass its predecessor in terms of the amount of student loan debt the class carries.

To a large extent, the high costs of tuition and fees charged by colleges are responsible for the increasing volume of student loan debt. Recently, Amanda Reaume wrote that college tuition and fees increased by an astonishing 1,120 percent since 1978. In the same duration, the price of food and medical expenses has increased by 244 and 601 percent respectively.

Salaries and employment opportunities have not risen at the same pace. Therefore, it is hardly surprising that several students find themselves struggling to repay their student loans. Even worse, there are no signs to show that this student loan debt crisis is slowing down.

The Fairness for Struggling Student Act of 2015

In this backdrop, the Fairness for Struggling Student Act of 2015 comes as a shot in the arm. It seeks to amend the current bankruptcy code by restoring the availability of bankruptcy relief for private student loans.

This will not bring relief to a large mass of struggling borrowers. Private lenders typically hold just about 10 – 15 percent of all student loan debt, with the US Department of Education holding the remainder. Out of a total student loan debt worth approximately $1.2 trillion, private student loans would constitute just about $165 billion.

However, given that private student loans tend to have higher interest rates, inadequate consumer protection and fewer repayment options, the Act could still make a big difference to many struggling borrowers. According to the Consumer Financial Protection Board (CFPB), about 850,000 private student loans worth approximately $8 billion in debt were in default in 2012.

Early Days Yet for The Fairness for Struggling Student Act of 2015

As mentioned earlier, the Act does not propose to make student loan debt dischargeable during bankruptcy for federal student loans. While announcing the Student Aid Bill of Rights, President Obama had mentioned that federal agencies were currently exploring the possibility of making federal student loans dischargeable during bankruptcy.

In a statement, Senator Dick Durbin said, “Too many Americans are carrying around mortgage-sized student loan debt that forces them to put off major life decisions like buying a home or starting a family. We can no longer sit by while this student debt bomb keeps ticking.” It is worth noting that Senator Durbin had introduced similarly named bills in 2010, 2011 and 2013. Each of those bills however, died in committee after the introduction.

Responding to the senators’ proposal, the primary trade group of the lending industry i.e. the Consumer Bankers Association highlighted that the government was barking up the wrong tree. It mentioned that less than three percent of private loan borrowers are experiencing financial distress. It stressed that the only way to tackle the high levels of student loan debt lay in devising solutions to counter the rising costs of college instead.

To become a law, the bill will need to sail through a Republican-controlled Congress first. It seems set to become the latest in a series of efforts by the Obama administration to help correct the student loan debt crisis at present. Until then, struggling student loan borrowers would only be able to avail of a select few situations for discharging their student loan debts.