Although Private Student Loans only make up $150 billion of the $1 trillion in student debt (15 percent), it still affects a much larger percent of those with Federal Student Loans. Since federal loans only cover tuition and fees, many students with federal loans still have to take out private loans to cover expenses such as off-campus housing and other expenses. Private loans are also used for tuition as non-accredited schools. Studies completed this year show that half of all student loans are now in default or deferred status.
Introduction of bill HR 532
Of the drawbacks to using private student loans to pay for college or technical schools, the inability to discharge them through bankruptcy proceedings is probably the biggest. While it is possible to come to a private agreement with the lender, no court in the U.S. currently has jurisdiction over these debts. There is legislation now making it way through Congress that could change that though.
U.S. Congressmen Danny Davis (D-IL) and Steve Cohen (D-TN) introduced bill HR 532 on February 6, 2013. This changes the current bankruptcy rules to allow judges to handle private student loans just like any other form of debt through a lending institution. Other legislation similar to HR 532 has been submitted previously, but never at a time when so many graduates over the last five years have had to struggle in a just now recovering job market. Because of this struggle that affects so many students and their parents; public support for changing the bankruptcy rules has never been higher. As of May 2013, this bill has 14 sponsors in the House of Representatives.
Will this really help?
Not every government agency believes this is the solution though. The Consumer Financial Protection Bureau (CFPB) believes that the current student debt problems could easily become another debt crisis similar to what happened with sub prime mortgages in 2008. A report they issued in July 2012 believes that changing the law to allow student loans to be discharged through bankruptcy would be the final straw to break this particular camel’s back.
They also condemned a solution from Campus Progress made earlier in February. This idea was that the government would purchase private student loans in order to lower interest rates and allow for repayment options, such as the Income Based Repayment, that is offered in federal student loan programs. The CFRB pointed out that this would only reward lenders who made the riskiest loans and provide no incentive to those lenders who behaved in a responsible manner to continue doing so.
One positive suggestion from the CFRB was to address the issue of rehabilitating the credit of those borrowers who did finally repay their loans despite doing so late and with penalties. The program currently used for rehabilitating credit for federal student loan holders is a viable one and would adjust to helping those with private loans very easily.
The Student Loan Fairness Act
One other option might be passing the Student Loan Fairness Act. This is legislation introduced by Congresswoman Karen Bass (D-CA) in March 2013. It does not provide for discharge through bankruptcy, but instead uses the 10 – 10 model similar to many federal student loan programs. That is capping the monthly payments at 10 percent of the borrower’s discretionary income and after 10 years (120 months) of qualified payments, the remaining debt may be forgiven with not even taxes due on it. For those students who are currently unemployed, they would be able to defer payment without penalty until they do find work.
The Student Loan Fairness Act would also allow for private student loans to be converted into federal loans with all of the benefits that would entail. To accomplish this, borrowers would have had to be qualified for a federal student loan at the time of they took out their private loan. Their current gross income would also have to be less than the total amount of private debt they still owe on that loan.
No matter what solutions are eventually adopted, $1 trillion in student debt has to be addressed. Even if lawmakers can only work out solutions for the $150 billion in private loans, it will provide much needed relief for many graduates and their parents, who are struggling to find full-time employment, pay their bills and continue pursuing their own personal American Dream. Allowing borrowers to take advantage of Private Student Loan Forgiveness can go a long way in solving this crisis.
