Durbin, Cohen and Others Introduce Legislation to Restore Fairness in Student Lending

Bill will make private student loans dischargeable in bankruptcy

[WASHINGTON, D.C.] – U.S. Senators Dick Durbin (D-IL), Sheldon Whitehouse (D-RI) and Al Franken (D-MN) today joined U.S. Representatives Steve Cohen (D-TN), Danny Davis (D-IL), George Miller (D-CA) and John Conyers (D-MI) to introduce legislation in both the Senate and the House that will restore fairness in student lending by treating privately issued student loans in bankruptcy the same as other types of private debt.

Before changes were made to the bankruptcy code in 2005, only government issued or guaranteed student loans were protected during bankruptcy. This protection has been in place since 1978 and was intended to safeguard federal investments in higher education. 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.

“Students, especially those at for-profit schools, who find themselves unable to get enough government aid to pay their high tuition are turning to private loans to fill the gap,” said Durbin who first introduced this legislation in June 2007. “Unlike federal student loans, there are few consumer protections available for these private student loans leaving some students stuck with this debt for the rest of their lives. Today’s bill will restore some fairness in student lending, by allowing financially distressed borrowers of private student loans to discharge those loans in bankruptcy, just as other types of private debt can be discharged.”

“People who seek higher education to better their futures should not be dissuaded from doing so by the threat of financial ruin,” said Cohen. “The bankruptcy system should work as a safety net that allows people to get the education they want with the assurance that, should their finances come under strain by layoffs, accidents, or other unforeseen life events, they will be protected. My bill takes a modest but important step in achieving this goal.” Congressman Cohen held a hearing on the dischargeability of student loan debt in bankruptcy in September 2009. He is a longtime advocate of making a higher education more affordable and accessible, most notably through the establishment of the Tennessee Lottery.

For the past decade, private student loans have been the fastest growing and most profitable part of the student loan industry. 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. This can place a tremendous burden on student borrowers with private loans and 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.


“By repealing special treatment for private lenders, we will hold big banks accountable, protect young people from abusive lending practices, and provide relief for graduates trapped by loans that can too often carry high interest rates and unfair terms,” said Whitehouse.


“At a time when people all over the country are struggling to find jobs, we need to make the lending process more fair and make it more affordable for Minnesotans to invest in their education,” said Franken. “This bill will force private student lenders to follow the same rules as other private lenders and make it easier for people who need student loans to get them without putting their entire financial future at risk.”


“The 2005 bankruptcy restrictions penalize borrowers for pursuing higher education, provide no incentive to private lenders to lend responsibly, and likely affect African American borrowers more negatively than other borrowers,” said Davis. “I am proud to join with my colleagues to ensure that our statutes do not unintentionally burden particular groups of people. Private education debt is no different than other consumer debt; it involves private profit and deserves no privileged treatment. I will work actively with Senator Durbin and Congressman Cohen to protect student borrowers.”


“The dream of a college degree should not require students to mortgage their future,” said Miller, senior Democrat on the Education and the Workforce Committee. “But with college tuition continuing to rise, private loans are becoming a necessity for some students and unfortunately, they can become unmanageable. For borrowers in financial trouble, bankruptcy is the last resort. This legislation ensures equal consumer protections exist for student loan borrowers as they do for borrowers of other private debt."


“There is no principled justification to treat private, for-profit student loan debt differently from other kinds of unsecured debt such as credit cards, payday loans, or personal loans under bankruptcy law,” said Conyers. “Yet, by not allowing private student loan debt to be discharged in bankruptcy, except in the most extreme circumstances, current law is working against these borrowers.”


Private loans involve only private profit and do not have the protections that government borrowers enjoy, including caps on interest rates, flexible repayment options, and limited cancellation rights.

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 escape child support responsibilities, overdue taxes, and criminal fines. Privately issued student loans should not be on that list.


Today’s legislation is supported by 35 groups and organizations including the American Association of State Colleges and Universities, American Council on Education, American Federation of Teachers, Americans for Financial Reform, Consumer Federation of America, Consumers Union, The Institute for College Access and Success, National Association of Student Financial Aid Administrators, National Consumer Law Center and U.S. PIRG. A full list can be found HERE