The Department of Education (DOE) and the CFPB are pushing Congress to make it easier for students to discharge student debt issued by private lenders by filing for bankruptcy protection. The recommendations of the DOE and CFPB would not affect the majority of student debt, which is issued by the federal government, because federal loans already offer leniency in the form of deferrals, forbearance or more flexible payment options. No such cushion exists for private loans.
Before the mid-1970s, both federal and private education loans were dischargeable in bankruptcy. However, Congress then started to restrict federal loans from being discharged and in the mid-1980s, private loans guaranteed by a nonprofit agency became exempt from bankruptcy. Since 2005, no education loan can be discharged without an "undue hardship," a challenging hurdle few overcome. The position of the DOE and CFPB is that private loans offer very little flexibility to struggling borrowers, particularly in today's tough economic climate, thus making reform necessary. Although bankruptcy has long-lasting repercussions (e.g., challenges in securing credit cards or mortgages down the line and/or paying much higher interest rates if approved), it may be the only option for young 20-somethings with over $100,000 in debt and no job prospects in sight.
Richard Hunt, president of the Washington-based Consumer Bankers Association, is concerned about the new initiatives stating, "We made a contract with students to repay their loans, and that's how the banking system operates." Hunt anticipates a rush of bankruptcy filings if private student loans are allowed to be discharged in bankruptcy. However, Sallie Mae, the nation's largest private issuer of student loans, takes a more measured approach by supporting reform that would allow federal and private student loans to be dischargeable in bankruptcy in limited cases. It issued a statement that "Sallie Mae continues to support reform that would allow federal and private loans to be dischargeable in bankruptcy for those who have made a good-faith effort to repay their student loans over a five-to-seven year period and still experience financial difficulty."