[WASHINGTON, D.C.] – U.S. Senator Dick Durbin (D-IL) today introduced legislation that will allow private student loans to be discharged after a borrower files for bankruptcy.  Under changes made to the bankruptcy code in 2005, private student loans were given the same preferred treatment as government-guaranteed student loans.  Currently, both government-guaranteed loans and private student loans are not dischargeable except under very extreme circumstances.  This can place a tremendous burden on student borrowers with private loans.

    “Private student loans are incredible money-makers for loan companies, and students end up saddled with sky-high interest rates and mountains of debt,” said Durbin. “I don’t think many 17 or 18 year-old students realize the long-term impact of their loan decisions.  Some of these private student loan repayment schedules – with double-digit interest rates – can follow a student borrower from graduation to the grave.”

    Private student loans are the fastest growing and most profitable sector of the student loan industry.  Since 2001 the market for private student loans has grown at an annual rate of 27% to $17.3 billion in 2006 – roughly 20% of total student borrowing.  Ten years ago, only 5% of total education loan volume was in private loans.  The interest rates and fees on private loans can be as onerous as credit cards.  There are reports of private loans with interest rates of at least 15% and higher rates are not unheard of.  Unlike federal student loans, there is no government-imposed loan limit on private loans and no public regulation over the terms and cost of these loans.

    Previously, only government issued or guaranteed student loans were protected during bankruptcy – meaning that only federal or state loans were not dischargeable.  This protection has been in place since 1978 and was intended to safeguard federal investments in higher education.  In 2005, a provision was added that extended the same bankruptcy protections to private lenders participating in the student loan industry. The Durbin bill restores the bankruptcy law, as it pertains to private student loans, to the language that was in place before 2005, so that privately issued student loans will once again be dischargeable in bankruptcy, placing student loan companies in the same position as virtually all other private creditors.  The bill also clarifies that existing protections are specific to loans that were issued by or are guaranteed by state or federal governments.