The House Judiciary Committee's Subcommittee on Commercial and Administrative Law held a hearing yesterday to discuss the Private Student Loan Bankruptcy Fairness Act of 2010 (H.R. 5043), a bill that would allow private student loans to be discharged in bankruptcy.
Two versions of the legislation have been introduced in Congress, one in the House and one in the Senate (S. 3217). The Senate bill would allow all private education loans to be discharged in bankruptcy, while the House bill would not allow private loans substantially funded by a nonprofit institution to be discharged. Neither bill would allow federal student loans to be discharged in bankruptcy.
"The bankruptcy system should work as a safety net that allows people to get the education they want with the assurance that, should their finances come under strain by layoffs, accidents, or other unforeseen life events, they will be protected," said the House bill's co-author and the subcommittee's Chairman Rep. Steve Cohen (D-TN). "My bill takes a modest but important step in achieving this goal."
Peter Warren president of the Education Finance Council, an association of nonprofit and state-based student loan providers, expressed concern about the Senate bill.
"Making all private student loans funded by nonprofits completely dischargeable in bankruptcy would raise financing costs, harming the ability of these public-purpose entities to continue to offer below market interest rates to borrowers," Warren said.
H.R. 5043 has garnered support from NASFAA and other groups representing students, consumers, institutions of higher education, and civil rights and public policy organizations. Rep. George Miller (D-CA), chairman of the House education committee, also expressed his support for the bill in a press release.
"Especially in this economy, private student loan borrowers deserve the same basic protections consumers receive when using their credit cards, buying a car, or paying their electric bills," Miller said.
Unintended Consequences
Loan providers are a bit more cautious about the bills and have some changes they would like Congress to consider. Conwey Casillas, Sallie Mae's vice president of public affairs noted that Sallie Mae "continues to support reform that would allow federal and private student loans to be dischargeable in bankruptcy for those who have made a good-faith effort to repay their student loans over a five-to-seven year period and still experience financial difficulty." Casillas emphasized that Congress should extend the same consumer protections to all education loans, regardless of the source or tax status of the entity or governmental institution providing the funds.
Congress should also be careful not to inadvertently invite new abuses or increase consumer costs and decrease loan availability, according to Casillas. During Sallie Mae's earnings call yesterday morning, the company's Vice Chairman and Chief Financial Officer Jack Remondi noted that legislation preventing student loans from being discharged in bankruptcy was enacted in the 1970s to prevent students graduating with high debt burdens from filing for bankruptcy and walking away from their burdens.
Remondi also noted that the bill would further restrict private loan borrowing for students that don't have a co-borrower, currently 15 percent of Sallie Mae private loan borrowers. Loans with a co-borrower are a safer investment because it is highly unlikely that both the parent and student borrower would file for bankruptcy simultaneously.
"It's going to be harder for us to make the loans to the 15% that didn't have a cosigner," Remondi said.
Media Coverage
Lawmakers Introduce Bills to Change Student-Loan Bankruptcy Policy Chronicle of Higher Education
Congress considers easing student-loan burdens MarketWatch
Posted 04/23/10 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web site questions or comments to Web@NASFAA.org.
