Since 2005, private student loan lenders have enjoyed a special privilege in bankruptcy – their loans are not automatically discharged (eliminated) in bankruptcy. This sets them apart from credit card lenders, medical providers, and most other lenders of unsecured loans and credit. This special privilege puts them on par with entities such as the Department of Education and parents who are owed child support. And, believe it or not, it even gives them an advantage over the IRS. You can get rid of certain older income tax debts in bankruptcy, whereas your private student loans can be as old as the hills and it doesn’t matter for bankruptcy. (You can discharge student loans in bankruptcy if you prove undue hardship, a difficult standard to meet. It hasn’t helped many student loan borrowers over the years.)
There doesn’t seem to be any good reason for the private student loan industry’s special privilege (more on that in a previous blog post), other than the fact that banks form a powerful lobby. And consumer advocates have been vehemently pointing this out in recent years as the student loan debt crisis heightens in our country (student loan debt has surpassed credit card debt in the U.S. – no easy feat).
Even Congress is taking notice – some legislators are pushing to take away the special privilege that private student loan creditors enjoy in bankruptcy, and instead treat them like other unsecured creditors, such as credit card companies.
In a Senate Banking Committee hearing yesterday on Capitol Hill, Senator Elizabeth Warren did a great job of highlighting just how little banks do to help private student loan borrowers who are struggling to repay their debt (unlike the federal government, which provides an array of flexible repayment programs, loan forgiveness, and cancellation options for federal student loans). She recounted the story of a couple who takes care of their three grandchildren because the children’s mother (the couple’s daughter) died. The couple cosigned a private student loan with their now-deceased daughter, and is now struggling to raise three little children and make payments on the $100,000 loan. They tried to get some help or relief from the bank, but not surprisingly (at least to any of you who has a private student loan), they hit a brick wall. No loan forgiveness even though the student borrower is dead. No loan modification to stretch out payments over time, reduce the interest rate, or offer some other way for them to afford the payments. Nothing.
Senator Warren’s spirited exchange with Richard Hunt, President and CEO of the Consumer Bankers Association, is worth a listen – it exemplifies how the private student loan industry does nothing to help struggling borrowers while at the same time enjoys an immense advantage in bankruptcy. (Listen to the exchange on YouTube: https://www.youtube.com/watch?v=haoKLe3rJxc&feature=youtu.be). As Mr. Hunt tries to assure the committee that there are options for struggling borrowers, Senator Warren refuses to let him off the hook. The colloquy highlights what anyone with a private student loan already knows – those assurances are meaningless. Senator Warren’s questioning makes clear that there is one fair option – removing the private student loan industry’s special treatment in bankruptcy.