This week 13 Democratic Senators announced a bill to bring bankruptcy back to the world of student loans. While this announcement comes on the heels of President Obama’s Student Aid Bill of Rights announcement, it is a much bigger step than the President was willing to take.
The Senate Bill, called the Fairness for Struggling Students Act of 2015, would restore bankruptcy protection to all private loans.
Though private loans only represent approximately 10% of the $1.3 trillion in student debt, this bill would help the student loan borrowers who are struggling the most.
In the words of Senator Dick Durbin, a co-sponser of the bill, “too many Americans are carrying around mortgage-sized student loan debt that forces them to put off major life decisions like buying a home or starting a family. We can no longer sit by while this student debt bomb keeps ticking.”
A light at the end of the tunnel
The truly scary part about student loans, especially private student loans, is that hopeless situations are all too common.
For most people, bankruptcy is a financial remedy reserved for desperate situations. Whether you get in over your head starting a business, or rack up an insurmountable amount of credit card debt, bankruptcy is that flicker of light at the end of the tunnel. It is an ugly process, but it is also a fresh start and a reason for hope.
Student loans are the only form of consumer debt with significantly different bankruptcy rules. Put simply, bankruptcy is nearly impossible for student loans.
For those with federal loans, the lack of bankruptcy protection is not ideal, but there are still protections in place. Borrowers who cannot afford their debt are able to sign up for plans like Pay As You Earn. Pay As You Earn (PAYE) provides borrowers with reasonable payments based upon their income and a path to student loan forgiveness. It isn’t an easy process, but it ensures that federal borrowers are not left with bleak options.
Private student loans have no such protection. Borrowers are at the mercy of their lenders. If they rack up too much debt, the face huge bills, wage garnishments, and court judgments. Once a borrower falls behind, the situation gets progressively worse. The balance grows with late fees and compounding interest. Many borrowers face debt spiraling out of control with no real way to stop it.
The significance of bankruptcy in private loans
Restoring bankruptcy rights doesn’t just help those in the most desperate situations, it is a huge step forward on many other fronts.
Those with private student loans may find lenders become more agreeable to working out reasonable payment plans and interest rates. Right now lenders know there is little a borrower can do to get out of paying the debt and if they can garnish wages for life, they get a nice return on their investment. Their behavior towards borrowers may change dramatically if they face the real possibility of only collecting pennies on the dollar for their loans.
Not only would lenders be forced to be more reasonable with their current borrowers, they would also have to be more responsible when it comes to lending. By forcing lenders to exercise caution in lending, all college students would be better off.
Part of the reason that college is so expensive today is that nearly anyone can get student loans, so the cost of attendance is artificially high. Careful lending would make student loans harder to get, and though a painful transition, this change could help drive down the cost of higher eduction.
Will the bill pass?
The bill is probably a long shot at best. Though it has the support of 13 Senators, it seems highly unlikely to get through the Republican controlled house. It may not even get through the Senate.
However, the existence of this proposal is noteworthy for a number of reasons. First, it is student loan legislation that would leave a lasting impact. Second, it invites a national discussion on the burden of student loans, and fixing higher education funding. Third, even if the bill dies this year, the Fairness for Struggling Students Act of 2016 or 2017 could be the one that goes the distance.
Bankruptcy rights for student loans were eliminated in small steps, bit by bit. This legislation could be the first tiny step at bringing them back.