Still paying for college? You’re not alone: according to the Consumer Financial Protection Bureau, consumers owe more than $1 trillion in student loan debt:
“That’s more than we owe on credit cards, more than we owe on car loans – and it’s still growing.”
“In an attempt to defuse the next potential ‘debt bomb,’ Sens. Dick Durbin (D-Ill.), Sheldon Whitehouse (D-R.I.) and Jack Reed (D-Ill.) co-sponsored the Fairness for Struggling Students Act in the Senate, and Congressmen Steve Cohen (D-Tenn.) and Danny Davis (D-Ill) introduced the Private Student Loan Bankruptcy Fairness Act in the House.”
Why do we need a special law for student loans? Because money borrowed to pay for school is different, explain Sun and Dolan:
“Currently, all student loans are non-dischargeable, meaning that they cannot be discharged in bankruptcy absent a showing of undue hardship. Showing undue hardship is difficult, so most student loans are effectively non-dischargeable.
It’s time for that special treatment to end, say lawmakers:
“According to Congressman Davis, ‘private education debt is no different than other consumer debt; it involves private profit and deserves no privileged treatment.’ By treating private student loans similarly to credit card debt, Sen. Reed hopes that the legislation will ‘send an important message to lenders and students that they need to be responsible.’”
Not surprisingly, lenders have a different perspective. But one that student borrowers should not ignore:
“[L]enders warn that allowing discharge of student loans would increase the cost for all student borrowers. The lenders say that allowing borrowers to discharge their private student loans would increase interest rates and decrease the available funds for new loans because of higher risks to lenders. Furthermore, because federal loans are capped to only cover tuition and certain approved fees, students may nevertheless have no choice but to obtain private loans at the higher interest rates to cover the gaps. The end result would merely increase the total cost of education for many borrowers.
Would these laws being proposed eliminate the looming student loan crisis? Not likely, say Sun and Dolan:
“[T]he Bills appear to offer only an incomplete solution to the problem because private student loans account for less than 80% of total student loans in the U.S. Many individuals argue that the root cause of the student debt problem is actually rising tuition costs, so allowing borrowers to discharge their private student loans would accomplish nothing more than creating ‘a one-time, unjust transfer from innocent lenders who did nothing more than give money to people in the hopes of being repaid someday.’”
In other words: maybe there’s a broader lesson here…
Read the update: New Legislation Introduced to Allow Discharge of Private Student Debt - Dechert LLP
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