College graduates overwhelmed by private student loans could see bankruptcy relief if proposed legislation makes its way through Capitol Hill. Supporters of the Private Student Loan Bankruptcy Fairness Act of 2010 argue that private borrowers lack important consumer protections that come with federal loans — such as deferment plans and income-based repayment options. Under legislation enacted in 2007, borrowers who work in public service jobs for at least 10 years can qualify to have the balance of their student loans forgiven. Also, private loans typically carry variable interest rates that are higher for those who can least afford them, supporters say. “Struggling borrowers have virtually no way to make private loan debt more manageable because lenders can simply refuse to negotiate affordable terms,” said Lauren Asher, president of the Institute for College Access and Success, which runs the Project on Student Debt. Still, private student loans are growing more rapidly than federal student loans, and if trends continue, the volume of private loans would surpass that of federal loans by 2025, according to FinAid.org, a comprehensive website devoted to financial aid. The average nonfederal debt per student was $17,000 in 2007-08, The College Board says. The volume of private student loans rose to $22.3 billion in 2007-08 from $15.1 billion in 2004-05, according to The College Board’s Trends in Student Aid. The credit crunch that froze financial markets, however, also hit private student lending — pushing down private borrowing by half during the 2008-09 school year to $11 billion. Bills recently introduced in the Senate and House aim to treat private student loans more like credit card and other consumer debts — meaning they would be discharged if a borrower meets the court’s strict bankruptcy criteria. Since 2005, bankruptcy law has prohibited private student loans from being shed in all but the most extreme cases. Other types of debt in this category include overdue taxes and criminal fines. Those who deal with bankruptcy proceedings say the debate can be boiled down to a simple maxim: “Where you sit depends on where you stand,” White Plains attorney Jeffery Binder says. “If you believe ultimately it’s the consumer’s responsibility to not take on more debt than you can handle … then you’ll come down on the side of the lender,” Binder said. “If you believe that lenders engage in practices that were predatory or misleading … then you’ll come down on the side of those who feel this is no different from any other consumer loan and should be discharged in bankruptcy.” The discussion comes as more students are turning to private student loans to finance their college ambitions — which themselves are growing ever more expensive. A more robust economic outlook and changes to student lending enacted as part of the health-care reform law are also thought to be encouraging private lenders back into the market. “People who borrowed for college and played by the rules deserve basic consumer protections and fair treatment when they hit hard times,” Asher said. Opponents, however, argue that such a change could make it more difficult to secure private funding for high education. They also are concerned people would game the system by running straight to bankruptcy court to shed their debt obligation. During a hearing on the plan earlier this month, Rep. Trent Franks, R-Ariz., the House Judiciary Committee’s ranking minority member, said that while reform is necessary, he is fearful about the bill’s potential consequences. “If lenders are forced to scale back student lending because private student loans are subject to bankruptcy discharge, many students will be denied access to higher education,” Franks said.
