Congressman Steve Cohen (TN-09) today called for passage of legislation he authored that will restore fairness in student lending by treating privately issued student loans the same as other types of private debt in bankruptcy. Yesterday, the Consumer Financial Protection Bureau (CFPB) and the U.S. Department of Education released a report that describes the risky practices and debt that stemmed from the boom and bust of the private student loan market in the past ten years. According to the CFPB's estimates, outstanding student loan debt in the United States topped $1 trillion in 2011 -- including approximately $150 billion of private student loan debt. One of the recommendations contained within the report concerns whether changes are needed to the treatment of private student loans in bankruptcy proceedings.
"This new report underscores why we must take action on student loan debt," said Congressman Cohen. "People who seek higher education to better their futures should not be dissuaded from doing so by the threat of financial ruin. 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. My bill takes a modest but important step in achieving this goal."
Before changes were made to the Bankruptcy Code in 2005, only government issued or guaranteed student loans were protected during bankruptcy. This protection has been in place since 1978 and was intended to safeguard federal investments in higher education. Congressman Cohen's bill would amend the Bankruptcy Code to restore the dischargeability of private student loan debt in bankruptcy that was available before 2005.
For the past decade, private student loans have been the fastest growing and most profitable part of the student loan industry. The interest rates and fees on private loans can be as onerous as credit cards. There are reports of private loans with interest rates of at least 15 percent and higher rates are not unheard of. This can place a tremendous burden on student borrowers with private loans and unlike federal student loans, there is no government-imposed loan limit on private loans and no public regulation over the terms and cost of these loans.
Private loans involve only private profit and do not have the borrower protections that government loans have, including caps on interest rates, flexible repayment options, and limited cancellation rights. There are very few types of debts that the bankruptcy law makes non-dischargeable, and these are usually made non-dischargeable for sound public policy reasons. For example, the Bankruptcy Code makes non-dischargeable child support responsibilities, overdue taxes, and criminal fines. Private student loan debt should not be on that list.
In the Dodd-Frank Wall Street and Consumer Protection Act, Congress mandated that the CFPB and the U.S. Department of Education conduct a detailed study to determine where there might be consumer protection gaps in the private student loan market. For this report, the CFPB received loan data from nine lenders on over five million loans made between 2005 and 2011, as well as data from five nonprofit lenders.
Three major findings of the report by the CFPB and U.S. Department of Education are:
Private student loans are riskier: Used appropriately, private student loans have a role to play in financing higher education. However, compared to federal student loans, private student loans often lack repayment flexibility and other protections when borrowers are struggling to make ends meet. Most private loans have few options for payment modification or forbearance. Federal loans have a fixed interest rate and most private loans have variable rates, making estimates about future debt payments difficult. Prior to 2010, federal law did not require a disclosure showing the actual interest rate on a borrower's loan until after the lender documented the loan, approved the credit, and readied the check for mailing.
Lax underwriting practices rise during boom: Some lenders bypassed school financial aid offices and marketed loans directly to students. As a result, in many cases, the school could not review the borrower's financial need, compare it to the loan amount, or even verify that the borrower was enrolled. Many lenders also lowered the minimum credit score required to receive a private student loan so that they could originate and then sell off more loans. Many students did not understand the differences and features between federal and private loans. They ended up using riskier private loans before exhausting their safer federal options.
Borrowers are trapped after bust: Defaults on private student loans have increased since the financial crisis. Based on the CFPB's sample, there are now over $8.1 billion in defaulted private loans, representing more than 850,000 distinct loans. Congress amended the bankruptcy code in 2005 to make it tougher to discharge private student loans. There is little to no evidence that there was an improvement in price and it is unclear that there was an increase in access to credit as a result of these changes. Borrowers reported their lenders were unable or unwilling to modify or adjust repayment terms.
The full text of the study is available at: http://files.consumerfinance.gov/f/201207_cfpb_Reports_Private-Student-Loans.pdf
A fact sheet about the study is available at: http://files.consumerfinance.gov/f/201207_cfpb_Final-Students-Fact-Sheet.pdf
Text of the nearly 2,000 borrower comments can be found at: http://1.usa.gov/NamLh9