Congress Considers New Bankruptcy Rules on Private College Loans

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A possible fight over college loans is looming in Congress, but not over the maximum a student can borrow.  Instead, members of both the House and Senate have introduced bills that would allow private bank college loans to be dismissed in bankruptcy proceedings.

Although federal college loans and federally backed bank loans long have been exempt from dismissal in bankruptcy actions except in extreme circumstances, the largely unregulated private bank loans – most often used to finance attendance at for-profit colleges – were given the same no-discharge status in bankruptcy legislation passed in 2005.

“The high interest rate on private student loans have made them incredibly profitable for loan companies and saddled students with crushing debt,” Sen. Richard Durbin (D-Ill.) said when he and others introduced identical versions of the Private Student Loan Bankruptcy Fairness Act of 2010 in the House and Senate in April.

At a hearing on the matter the same month, Valisha Cooks, who borrowed to attend the for-profit online University of Phoenix, said after graduation her loans seemed to take on a life of their own.

Cooks graduated with about $41,000 in federal loans and $36,000 in private loans -- $30,000 of which, a University of Phoenix official said, were for her education there. Three years later, however, she said the lender for her private loans tacked more than $16,000 to her principal balance, which she says now stands at $53,000.

“I assumed that I would be better off with a college degree,” Cooks testified at the hearing. “But after college my loan payments were $1,150 a month, $750 of which was for the private loans,” Cooks testified. “That amounts to more than half of my take home pay,”

Cooks said she filed for bankruptcy, but that only resolved about $10,000 in debt.

“Now, even though I have a good job, I can’t afford to pay all my bills in any one month,” said Cooks, who works at the University of California Los Angeles as an education coordinator. “I go to food banks to feed my son, and I will never be able to buy a house.”

Proponents of the legislation say it’s a safety net for student loan borrowers who find themselves unable to pay off their student loans.

“It’s just common sense to have a safety net for people who get into really difficult situations,” Edie Irons, spokeswoman for the California-based Project on Student Debt, told Youth Today.

“We provide bankruptcy protection for gambling debt and credit card debt and other types of consumer credit,” Irons said. “Especially in a recession, it’s an important tool to clear out bad debt that’s probably not going to be paid back and allow people to move forward with their lives.”

But opponents of the legislation say it puts the private student loan industry at undue risk with borrowers who at the time of taking out the loan generally have no job and little else to lose. Further, he said it may induce students to file for bankruptcy in order to avoid payment, not realizing that bankruptcy has consequences of its own.

A total of 136,142 consumer bankruptcies were filed nationwide in May -- a 9 percent increase over the 124,838 that were filed in May 2009, according to the American Bankruptcy Institute.

“Students are smart but relatively immature consumers of very expensive goods and services, like a college education,” John Hupalo, managing director at  Samuel A. Ramirez & Co., Inc., a New York-based investment firm, testified during the same Congressional hearing.

Some young graduates, he said, might figure: “With no assets to lose, an education in hand, why not discharge the loan without ever making a payment to the lender?

“I fear that borrowers just out of school would discount other risks and be saddled with unintended consequences potentially hampering their ability to buy furniture or a car or their first home on credit a few short years after the discharge,” Hupalo said.

Irons, of the Project on Student Debt, dismissed the idea that allowing the private student loans to be dismissed through bankruptcy court would lead more young graduates to file for bankruptcy.

“Bankruptcy is a painful choice and we don’t expect people to make it unnecessarily,” Irons said.

  • Not quite

    “Instead, members of both the House and Senate have introduced bills that would allow private bank college loans to be dismissed in bankruptcy proceedings.”

     

    This is not exactly true. The Senate’s bill includes ALL private sutdent loans, whereas the House bill only includes private loans that were generated from for-profit banks (this is only a small percentage of the private student loan industry).

     

    It is very important that the Senate’s version of the bill passes in order to bring fairness back to the bankrupcty laws.

  • Ray Hickman

    I am 52 years old. I used private loans to attempt to get into nursing school 3 years ago. I was going to hopefully get some forgiveness of my federal loans for working in a high shortage area. CA has no room for nursing students. I’ve tried for 3 years for acceptance. the 90,000.00 I eventually borrowed to satisfy my nursing pre-reqs as well as pay for nursing school on the community college level is now gone. My dreams are gone. I owe $182,000.00 in federal and private loans for my Univ of Phoenix Business degree and my nursing pre-req work. I make enough to barely pay my monthly expenses and am continually in trouble with Sallie Mae and AES. I’ll be dead before any dent is made in my principle. I cannot continue but stand to lose my Medicare benefits as well as Social Security benefits if I don’t pay. I work so I cannot prove undue hardship. I feel hopeless and sometimes hope I get a debilitating disease so I can put an end to the suffering. How do you all cope?

  • Nancy Lewis

    The House bill does not permit dismissal of private loans made by nonprofits, such as Sallie Mae, but both bills cover private bank loans, as the story says.

  • Dave

    When will they bring this up for vote?

  • STEVEN

    WHEN WILL THEY BRING THIS BILL UP FOR A VOTE?

  • ROBERT

    Nancy Lewis – 6/10/2010

    The House bill does not permit dismissal of private loans made by nonprofits, such as Sallie Mae, but both bills cover private bank loans, as the story says.

     

    ACTUALLY THIS IS INCORRECT!!!!  YOU CAN DISMISS PRIVATE STUDENT LOANS FROM SALLIE MAE!!!  THE ONLY THING THE PROPOSED BILL DOESN’T WORK FOR IS FEDERAL STUDENT LOANS.  SALLIE MAE LENDS FEDERAL AND PRIVATE, IF YOU HAVE PRIVATE STUDENT LOANS WITH SALLIE MAE YOU CAN HAVE THEM DISMISSED.  SALLIE MAE IS THE LENDING INSTUTION THAT PEOPLE OWE THE MOST MONEY TO AND NEED TO HAVE FORGIVEN.  IF YOU COULDN’T DISMISS SALLIE MAE LOANS THEN THIS BILL WOULD NOT HELP VERY MANY PEOPLE.

  • ROBERT

    ALSO, SALLIE MAE IS A FOR PROFIT COMPANY.  THEY LOAN MONEY FEDERALLY AND PRIVATELY.  I DON’T KNOW HOW THEIR FEDERAL LOAN PROGRAMS WORK BUT THEY SURE AS HELL WOULDN’T BE LOANING MONEY PRIVATELY TO PEOPLE WITHOUT JOBS IF THEY WERENT MAKING MONEY.  I OWE OVER 150K TO SALLIE MAE FOR PRIVATE STUDENT LOANS.  AS SOON AS THIS BILL PASSES I AM SAYING ADIOS TO THOSE LOANS.

  • Emily Morgan

    Can you tell me, How it is possible for Sallie Mae to stay in business for so long and the government not put a stop to the way they rip off students. Tell me how a loan that was $34,000. became a loan for $63,000 in a matter of 5 years, and how is it possible for a young person just starting out in these hard times to pay this kind of cash advance loans out to a company with no heart. When are we going to see a change for the better of the people and not the highway robbers that are getting fat on the sweat of the poor.