CFPB Pushes Bankruptcy Protection for Student Loans
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The Fiscal Times
July 25, 2012

With overall college loan debt now surpassing $1 trillion and telltale signs of a new emerging debt bubble, it was only a matter of time before advocates for college students and their families pushed for a change in the federal bankruptcy law to once again allow those swamped by debt to turn to bankruptcy court for relief.

The nation’s bankruptcy lawyers recently reported a sharp increase in the number of clients seeking relief from student loans. And just last week, the new federal Consumer Financial Protection Bureau said that Congress should consider allowing the hardest-pressed borrowers who are unable to keep up with their payments over a four to five year period to discharge their private student loans through bankruptcy.

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“Many private student loan borrowers entering the labor market in the wake of the recent recession have faced significant challenges, and many have defaulted on their private student loans,” the report stated. “Bankruptcy discharge may be an essential protection against consumer injury that might otherwise result when a consumer lacks the income or other means to manage debt. However, that benefit generally does not apply to student loans. These loans are virtually immune from discharge in bankruptcy.”

But this push to alter legislation that currently limits the ability of borrowers to turn to the bankruptcy courts for relief on student loans has run into strong conservative opposition on Capitol Hill – and received a decidedly cool reception Tuesday during a Senate Banking subcommittee hearing on the problems within the private student loan industry. 

Student loans differ from most other types of loans in that they generally have lower interest rates and often don't even require credit checks or collateral. Government backed Stafford loans are based on financial need -- either for people from low income families or higher income people attending expensive schools. They provide a variety of deferment options and extended repayment terms that you could never get with a conventional loan or even a private student loan.
Private student loans are more like typical commercial loans, with higher interest rates and tougher repayment terms  and penalties. They are intended to supplement federal student loans, not replace them; for many students, federal loans aren't enough, and in this case, private loans can be a good final source of funding.
For all borrowers, the average debt in 2011 was $23,300, with 10 percent owing more than $54,000 and 3 percent more than $100,000, the Federal Reserve Bank of New York reports. Average debt for bachelor degree graduates who took out loans ranges from under $10,000 at elite schools like Princeton and Williams College, which have plenty of wealthy students and enormous endowments, to nearly $50,000 at some private colleges with less affluent students and less financial aid.

Following a surge in former students declaring bankruptcy, Congress acted to protect lenders beginning in 1977. At first, the law limited the ability of borrowers with government loans to use bankruptcy as a way out, and later the ban was changed to apply to all student loans, including those from private institutions and the federal government. The proposal outlined by the Consumer Financial Protection Bureau last week would extend bankruptcy protection only to the 7 percent of college loans provide by Sally Mae and other private financial institutions. Holders of federal loans could not file for bankruptcy.

Sen. Bob Corker, R-Tenn., the ranking member of the subcommittee, blasted the proposal, saying that seeking bankruptcy protection from student loan debt is “one of the most damaging things that a consumer can possibly do,” and would create a hardship for private lenders.

Washington Editor and D.C. Bureau Chief Eric Pianin is a veteran journalist who has covered the federal government, congressional budget and tax issues, and national politics. He spent over 25 years at The Washington Post.