Bill Aims to Remove Student Loan Bankruptcy Exemptions

Under a bill introduced in the U.S. Senate, private student loans would no longer be exempt from protections when borrowers file for bankruptcy.

People filing for bankruptcy protection haven’t been able to get student loans cleared since 2005. Before then, only government and secured loans were exempt.

The new bill, sponsored by Sen. Richard Durbin, D-Illinois, and signed by 12 other Democrat senators, comes as the White House and lawmakers are working on several fronts to address what is being called a student-debt crisis. The bill would return the issue to a set of laws that had existed since 1978. Secured and government loans were the only ones that were exempt from bankruptcy protections under those statutes.

But those loans also have caps on interest rates, flexible payment options and sometimes come with opportunities to get balances waived entirely.

When the law was changed in 2005, it incentivized banks to offer high-cost private loans to students who are sometimes unable to pay them back, Durbin argues. Borrowers owe $165 billion in private student-loan debt, according to Durbin’s office, and it often comes with high interest rates and other fees.

An estimated 40 million people carry student-loan debt, according to the Consumer Financial Protection Bureau. The bill is expected to have a difficult time given Durbin and his dozen co-sponsors are Democrats in a chamber controlled by Republicans.

Durbin, in a written statement, said, "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’s parents, siblings and even grandparents who co-signed private loans long ago and are still making payments decades later. We can no longer sit by while this student loan debt bomb keeps ticking."

President Obama last week rolled out a “Student Aid Bill of Rights” aiming to make repaying student loans easier. He told federal agencies to make some changes, including ordering the Department of Education to create a website to let student loan borrowers file complaints and provide feedback about lenders, collection agencies and colleges and universities involved in collecting debts.

Companies that service student loan will be required to alert borrowers when they’ve fallen behind on payments or when they’ve been transferred to another collector.