In April 2010, separate bills were introduced in the U.S. House and Senate to restore bankruptcy dischargeability of most private student loans. The House Judiciary Committee held a hearing on H.R. 5043. Deanne Loonin of NCLC testified in support of the legislation. Student loan borrower Valisha Cooks and attorney Adrian Lapas (on behalf of the National Consumer Bankruptcy Attorney Association) also testified in support of the bill.
Below is an excerpt from NCLC’s testimony addressing the industry’s claims that restoring bankruptcy rights hurts their business:
“Many creditors argue that treating student loans the same as other debts in bankruptcy would create greater risk for them. This is far from obvious. If most borrowers who file for bankruptcy cannot afford to repay their debts, a more restrictive bankruptcy policy is not going to make them more able to pay.
It is certainly true that private student loans, made without government guarantees, can be risky for both creditors and borrowers. Many students are young, with little or no credit history. Their earning power is mostly speculative. Yet responsible underwriting of student loans is not impossible. Recent trends in the industry show that creditors know how to sell less risky products. For example, industry-wide, 80-90% of private student loans originated in 2009 required a cosigner, up from 50-60% in 2007.
The fact is that the private student loan industry grew rapidly during the pre-2005 period when these loans were fully dischargeable in bankruptcy. This should not be so surprising. During the past decades of irresponsible lending, creditors threw credit around like candy in markets where the credit was dischargeable in bankruptcy (such as credit cards) and those where it was harder to write off debts in bankruptcy.
The industry has contracted in recent years even with a restrictive bankruptcy policy. For example, Sallie Mae’s private loan originations were down 55% in the fourth quarter of 2009 compared to the same period the previous year. The company cited tightening of underwriting criteria as a major reason for the decrease in loan volume. The more restrictive credit market has helped eliminate loans that never should have been made. This has forced schools and lenders to think twice before pushing these high priced products, a welcome market correction.
There is simply no good evidence that bankruptcy policy has much impact on creditor behavior. Interest rates, for example, were largely the same before and after the 2005 bankruptcy law which made private student loans more difficult to discharge in bankruptcy.
The business of private lending has expanded and contracted based on market opportunities, not based on bankruptcy policy. Some lenders continue to make high rate, risky loans even during the current economic climate. While some of the larger lenders have at least temporarily tightened criteria, other, less selective lenders have stepped into the market. In some cases, for-profit schools are making private loans knowing that the majority of their students will not be able to repay. Corinthian Colleges, for example, has told investors that it expects its students will not be able to repay 56-58% of its institutional private loans. Yet they keep making these loans, even with a restrictive bankruptcy policy, presumably because it lures students to their schools and gives them access to federal student aid dollars.
The road to higher access to education will never be paved with high rate private loans. Our nation’s record in helping low-income and other less advantaged students enter and complete college has been woefully inadequate when the private loan industry was booming and now that it is, at least temporarily, in decline. Yet students continue to try to improve their lives through education. Despite the decreased availability of private student loans, college enrollment has continued to grow. In fall 2008, total college enrollment, including all undergraduate and graduate students, surged by 3.7%, the largest percentage increase since 2002, even though private student loan volume dropped by an estimated 30% or more for the 2007-08 school year.
We wrote in conclusion:
Restricting the bankruptcy safety net helps give private lenders some additional peace of mind and potentially more profits. These goals reflect industry interests, not the key policy goals of improving access to education and making college more affordable.
Bankruptcy policy should be about the pragmatic need to offer fresh starts to many debtors. Bankruptcy is the legal recognition that someone lacks the resources to meet financial obligations. There are many rules in place to ensure that only borrowers who are financially distressed get relief. It is way past time to give financially distressed student borrowers equal access to relief.
Restricting the bankruptcy safety net helps give private lenders some additional peace of mind and potentially more profits. These goals reflect industry interests, not the key policy goals of improving access to education and making college more affordable.
Bankruptcy policy should be about the pragmatic need to offer fresh starts to many debtors. Bankruptcy is the legal recognition that someone lacks the resources to meet financial obligations. There are many rules in place to ensure that only borrowers who are financially distressed get relief. It is way past time to give financially distressed student borrowers equal access to relief.
