As Student Loan Debt Surpasses $1 Trillion, Senators Introduce Legislation to Address Crisis

Durbin, Harkin, Franken and others say it’s time to restore transparency, fairness and common sense to student loan process

[WASHINGTON, D.C.] – U.S. Senator Dick Durbin (D-IL) joined Chairman of the Senate Health, Education, Labor and Pensions Committee U.S. Senator Tom Harkin (D-IA) and U.S. Senator Al Franken (D-MN) in reintroducing two pieces of legislation – the Fairness for Struggling Students Act of 2013 and the Know Before You Owe Act of 2013 – to restore transparency, fairness and common sense to the student loan process. 


According to the Consumer Financial Protection Bureau, the student loan debt among college students surpassed $1 trillion last year.  This reflects an average debt load of $24,301 for each of the 37 million student borrowers in the United States, according to the New York Federal Reserve Bank.  The CFPB reports that approximately $150 billion of outstanding student loan debt is in private loans.


“The first two pieces of legislation I will introduce this Congress deal with what I think is one of the biggest threats to millions of working families – the growing student loan debt crisis,” said Durbin. “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.  It’s not only young people facing this crisis, it is parents, siblings and even grandparents who co-signed private loans long ago and are still making payments decades later.  It’s time for action.  We can no longer sit by while this student debt bomb keeps ticking.”


“Unless we take action to educate and protect borrowers, student loan debt will be the next mortgage crisis.  Young Americans are being hamstrung by record debt levels, forcing them to delay other important investments in their futures, including purchasing homes and saving for a secure retirement.  By empowering students with clear guidance about their federal financial aid options before they turn to more expensive private loans and restoring the option to discharge private loan debt through bankruptcy, the Know Before You Owe Act and the Fairness for Struggling Students Act will go a long way to help students make smart choices and provide relief to borrowers.  Students need to know how to avoid the higher interest rates and less favorable terms of private loans, so they can be on more stable financial footing when they graduate,” Harkin said.


“Mounting student loan debt not only saps the ability of students in Minnesota and across the country to prosper after they graduate, but it is now becoming a real threat to our country's economic well-being,” said Sen. Franken, a member of the Senate Education Committee. “The average Minnesota student now graduates from college with more than $25,000 in debt, and large repayment costs for many years afterward stop them from being able to purchase homes, cars or other goods which fuel our economy. That is why I’ve been pushing for commonsense reforms to the student loan process since I joined the Senate. The cost of a college education shouldn’t bankrupt a family.  As our economy continues to recover, this legislation will help protect our students.” 


The Fairness for Struggling Students Act of 2013 – also cosponsored by U.S. Senators Sheldon Whitehouse (D-RI) and Jack Reed (D-IL) – aims to restore fairness in student lending by treating privately issued student loans in bankruptcy the same as other types of private debt.  Since 1978, government issued or guaranteed student loans have been treated as nondischargeable during bankruptcy in order to safeguard federal investments in higher education.  In 2005, the law was unjustifiably changed to give private student loans the same privileged bankruptcy treatment as government loans, even though private student loans have vastly different terms and fewer consumer protections.  Today’s bill would restore 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 like nearly all other forms of private debt. 


“A basic principle of our country is a fresh start for those who get in over their heads with debt, if they’re willing to face the rigors of bankruptcy,” said Senator Whitehouse.  “Even this is denied for those drowning in private student loans, as the result of a provision snuck into the 2005 bankruptcy reform legislation in the dead of night.  This bill gives us the chance to right that wrong.”


“Private student loans should be treated the same as other private debt in bankruptcy proceedings. This legislation would restore limited bankruptcy protection and send an important message to lenders and students that they need to be responsible,” said Senator Jack Reed.  “Getting a higher education is essential today and I will continue working to help make college more affordable.  This bill will give student borrowers who are struggling more options to meet their financial obligations and get back on their feet.”


The Know Before You Owe Act of 2013 would require schools to counsel students before they sign on to expensive, even unnecessary, private student loan debt and inform them if they have any untapped federal student aid eligibility.  It would also require the prospective borrower’s school to confirm the student’s enrollment status, cost of attendance and estimated federal financial aid assistance before the private student loan is approved. 


There are several stark differences between private student loans and federal student loans. Federal student loans have fixed interest rates and offer an array of consumer protections and favorable terms, including deferment and forbearance in times of economic hardship, as well as manageable repayment options, such as the Income-Based Repayment and Public Service Loan Forgiveness programs.


In contrast, private student loans involve only private profit and often resemble credit cards rather than financial aid with uncapped variable interest rates (which spiked as high as 18% in recent years), hefty origination fees and few, if any, consumer protections.  Private student loans are ineligible for federal forgiveness, cancellation or repayment programs.


There are very few types of debts that the bankruptcy law subjects to a different standard, allowing for discharge in only the most extreme circumstances.  For example, the bankruptcy code makes it especially difficult for people to discharge child support responsibilities, overdue taxes, and criminal fines.  Privately issued student loans should not be on that list.