LoHud.com: Congress may extend bankruptcy relief to private student loans

By Diana Costello.

College graduates overwhelmed by private student
loans could see bankruptcy relief if proposed
legislation makes its way through Capitol Hill.

Bills recently introduced in the Senate and House
aim to treat private student loans more like credit
card and other consumer debts — meaning they
would be discharged if a borrower meets the court's
strict bankruptcy criteria.

Since 2005, bankruptcy law has prohibited private
student loans from being shed in all but the most
extreme cases. Other types of debt in this category
include overdue taxes and criminal fines.

Those who deal with bankruptcy proceedings say
the debate can be boiled down to a simple maxim:
"Where you sit depends on where you stand," White
Plains attorney Jeffery Binder says.

"If you believe ultimately it's the consumer's
responsibility to not take on more debt than you can
handle ... then you'll come down on the side of the
lender," Binder said. "If you believe that lenders
engage in practices that were predatory or
misleading ... then you'll come down on the side of
those who feel this is no different from any other
consumer loan and should be discharged in
bankruptcy."

The discussion comes as more students are turning
to private student loans to finance their college
ambitions — which themselves are growing ever
more expensive.

A more robust economic outlook and changes to
student lending enacted as part of the health-care
reform law are also thought to be encouraging
private lenders back into the market.

The average nonfederal debt per student was
$17,000 in 2007-08, The College Board says.

The volume of private student loans rose to $22.3
billion in 2007-08 from $15.1 billion in 2004-05,
according to The College Board's Trends in Student
Aid.

The credit crunch that froze financial markets,
however, also hit private student lending — pushing
down private borrowing by half during the 2008-09
school year to $11 billion.


Still, private student loans are growing more rapidly
than federal student loans, and if trends continue,
the volume of private loans would surpass that of
federal loans by 2025, according to FinAid.org, a
comprehensive website devoted to financial aid.

Supporters of the Private Student Loan Bankruptcy
Fairness Act of 2010 argue that private borrowers
lack important consumer protections that come with
federal loans — such as deferment plans and
income-based repayment options.

Under legislation enacted in 2007, borrowers who
work in public service jobs for at least 10 years can
qualify to have the balance of their student loans
forgiven.

Also, private loans typically carry variable interest
rates that are higher for those who can least afford
them, supporters say.

"Struggling borrowers have virtually no way to make
private loan debt more manageable because lenders
can simply refuse to negotiate affordable terms,"
said Lauren Asher, president of the Institute for
College Access and Success, which runs the Project
on Student Debt.

"People who borrowed for college and played by the
rules deserve basic consumer protections and fair
treatment when they hit hard times," Asher said.

Opponents, however, argue that such a change
could make it more difficult to secure private
funding for high education.

They also are concerned people would game the
system by running straight to bankruptcy court to
shed their debt obligation.

During a hearing on the plan earlier this month,
Rep. Trent Franks, R-Ariz., the House Judiciary
Committee's ranking minority member, said that
while reform is necessary, he is fearful about the
bill's potential consequences.

"If lenders are forced to scale back student lending
because private student loans are subject to
bankruptcy discharge, many students will be denied
access to higher education," Franks said.

Copyright 2010 The Journal News, a Gannett Co. Inc. newspaper serving Westchester, Rockland and Putnam counties in New York.