A Missed Opportunity to Help Borrowers in Desperate Straits

The U.S. House of Representatives delivered a body blow to financially-distressed student-loan borrowers earlier this month when it voted down an amendment to a key higher education bill that would have allowed private student loans to be dischargeable in bankruptcy. Overall, the amendment, sponsored by Rep. Danny Davis (D-IL), failed by a vote of 179 to 236, with nine Republicans supporting the measure and 52 Democrats opposing it. But some very strange arguments were made.

In attacking the Davis amendment, Rep. Ric Keller of Florida, the ranking Republican on the House subcommittee on education, expressed sympathy for those who find themselves in dire straits and can’t repay their loans. But then he argued that “the current system” offers them all the relief they need:

“Now what is a better way? The better way is the current system. You get out of school, you’ve got 10 years to make your payment, and if you can’t make it, you work with the lenders for more flexible options, let you pay over 25 years. The Bankruptcy Code already provides a provision for undue hardship for those people who truly need it.”

Sounds good, but far from being flexible, private loan providers have been notoriously unwilling to help struggling borrowers find ways to make repayment easier. And while it’s true that private loan borrowers who demonstrate that repaying their loans would cause “undue hardship” can have their loans discharged, courts have defined that standard extremely narrowly and unevenly, leaving many desperate borrowers with no way out.

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Let’s focus on Keller’s argument that private loan providers provide borrowers with flexible repayment options. In making this point, Keller appears to confuse the terms and conditions of private loans with those of federal student loans. Most federal loan borrowers are expected to repay their loans in ten years. Those who are struggling can choose more flexible options, such as ones that allow borrowers to pay a smaller amount at first, and then increase the amount over time, or others that allow them to pay as a percentage of their income. Under the direct loan program’s income contingency program and the new Income Based Repayment program, the federal government forgives any remaining balance after 25 years of repayment.

Private loans, on the other hand, typically start off with a 15 to 25 year repayment term. By stretching out the repayment period, private loan providers can make the loans, which carry high interest rates and fees, look cheaper because borrowers’ monthly payments are lower than they would be under a 10 year plan. Because the standard repayment period is so long, most lenders are reluctant to extend it. Sallie Mae does allow borrowers to stretch out their payments on the company’s private Signature Loans from 15 to 30 years, but appropriately warns that doing so will significantly increase the borrower’s total debt load.

Borrowers in the federal programs who become unemployed or suffer economic hardship have a legal right to have their loans deferred for up to three years. Private loan borrowers who run into trouble don’t have that option. And unlike federal loans, private loans are not automatically discharged if a borrower dies, is permanently disabled, or attends a school that unexpectedly shuts down before that student completes his or her studies.

At Higher Ed Watch, we have heard from many struggling and frustrated private loan borrowers who complain that their lenders have refused to work with them to make their payments more manageable. One such borrower wrote to us in July, saying:

“You can’t rehabilitate a private loan and get back into a life of prosperity and financial responsibility when a private lender will not offer you the opportunities to do so, and perhaps even adds 25 percent in fees if you go into default due to unforeseen circumstances.”

Mr. Keller, the current system is not “the better way,” because it does not operate the way you seem to think it does. A truly better way would be to treat private students the same as other forms of consumer debt when it comes to bankruptcy. Right now, they aren’t, and that’s wrong. People who borrow private student loans are trying to better their lives. They should not be treated more harshly than those who rack up credit card debt at the mall.

An effort to fix the system failed this time. But hopefully if lawmakers spend more time listening to actual private loan borrowers, and less time listening to the spin of loan industry officials, they will learn how the system really works and will demand change.