Even if students go bankrupt, private lenders still make them pay up

“What is so different about discharging student loans that is different from everything else that is dischargeable?” asked Rep. John Conyers, Jr. (D-MI) at Wednesday’s hearing about private (“alternative”) student loans and bankruptcy. “This isn’t a gambling debt, this isn’t something against the common good.” The hearing was held to reconsider a law that allows private lenders to prevent loans from being discharged if a student declares bankruptcy.

Unfortunately, only 4 out of 14 other committee members attended, but the majority of senators and witnesses echoed Conyers’ sentiments. The harsh and unforgiving treatment of private student loan debt is the exception to the rule for most noncriminal consumer debt. The current policy protects private lenders and puts borrowers in dire financial straits. Although federal student loans are also not dischargeable, they have numerous consumer protections, repayment options, and loan forgivness programs in place– private lenders do not.

There is a grave need to change this strange and dangerous policy. Witness Lauren Asher, President of the Institute for College Access and Success, spoke about the desperate situations of student borrowers today. College costs have outpaced family incomes, and financially trapped students must have honest lenders who will not prey on their need or ignorance. But Asher cited some highly disturbing examples of the predatory lending epidemic raging across our nation’s campuses.

Not only do some college officials receive perks in return for supporting certain private loan companies, some for-profit colleges have also begun purposefully making their own private loans directly to high-risk students, while expecting over half of the students to default. As another witness, attorney Brett Weiss, emphasized, private loans are huge profit centers. And the lenders who are capitalizing on them at the expense of students must be stopped.

Ranking committee member Rep. Trent Franks (R-Arizona) raised paranoiac concerns that requiring private lenders to allow bankrupt students to discharge on their loans would raise interest rates and drive capital out of the loan market; he fears an ulterior motive of a broad government effort to move to a single lender higher education system.

Asher quickly disbanded his arguments, however. The single lender argument has no precedent, she said; it didn’t happen with mortgages, so why should it happen now?

Those against a change were also troubled by the ridiculous thought that students will abuse loan companies if they know they can “just” declare bankruptcy and get a “clean break.” Thankfully, Asher defended our intelligence by pointing out that we students do not consider bankruptcy a financial strategy; we know that it has many very serious consequences for our future job access, credit scores, and homeownership, just to name a few.

Both parties of the debate acknowledged the need for a clarification of the standards for “undue hardship,” and those opposed to a change began to acknowledge the need for more consumer protection. In the end, Committee Chairman Steve Cohen (D-Tennessee) announced that he planned to introduce legislation to put protections in place for students who borrow from private lenders.

I think Rep. Cohen has the right idea about how to solve this issue. What is the lender plan? Well, one private loan company joked to a desperate Illinois woman, “Hey, you can always sell a kidney to pay off your loans!” (Of course, how can empathy be expected from companies that are fully eligible for the bankruptcy protection that they deny us?) Thanks for the tip, lenders, but we’d much rather change the contemptible current policy, which you have lobbied so hard for.