Senator Dick Durbin of Illinois has introduced new legislation which would allow private student loans to be discharged in bankruptcy.
The 2005 changes to the bankruptcy code gave private student loans the same preferred, and non-dischargeable, status as government-guaranteed student load. Both types of student loans are non-dischargeable debt except in very limited circumstances where the debtor can prove that repayment would impose an "undue hardship".
Since 1978, government issued or guaranteed student loans have not been eligible for discharge when a person files for bankruptcy protection. This measure was intended to protect federal investments in higher education. In 2005, the same became true for private student loans.
The new bill introduced by Durbin seeks to restore the bankruptcy law to the original provisions regarding student loans. If the law is passed, private student loans would then be eligible for discharge in bankruptcy.
Durbin has stated, "Private student loans are incredible money-makers for loan companies, and students end up saddled with sky-high interest rates and mountains of debt. I don't think many 17 or 18 year-old students realize the long-term impact of their loan decisions. Some of these private student loan repayment schedules - with double-digit interest rates - can follow a student borrower from graduation to the grave."
Since 2001, the private student loan market has exploded. Private student loans are very profitable for lenders; with current bankruptcy laws they are virtually guaranteed to be repaid, even if it takes the student his or her whole life to repay the debt. In 2006 the private student loan market accounted for approximately 20 percent of all student loans. This is in contrast to ten years ago, when the private lenders only got 5 percent of the student loan business. Private student lending has grown 27 percent per year since 2001.
The interest rates and fees on private student loans can be as financially burdensome as credit card debt. It is not rare for a private student loan to charge 15 percent or more in interest. Since there is no government regulation of these loans, there is not a limit to the amount a student can borrow. Can you imagine charging a college education on a credit card with no spending limit? Private loans are similar to doing just that, except that consumer credit card debt can be discharged when a debtor files for bankruptcy. Under the current bankruptcy laws, these private student loans can not be discharged and continue to accumulate interest at these high rates for the life of the loan.
With federal student loans there are limits in place to restrict the amount a student can owe.
If the Durbin student loan bill becomes law, private student loan lenders will be in the same position as any other credit card company or private lender. Then, when private student loans are able to be discharged, let's watch the lending practices change. Once private companies become concerned that they may not have their student loans re-paid they may rethink the idea of unlimited student loans.