Congressional Amendment on Private Student Loans Deserves Support

A proposal to repeal the enhanced nondischargeability provisions of the 2005 Bankruptcy Abuse Prevention Act relative to private student loans is scheduled for a vote in The House of Representatives today as an Amendment to the Higher Education Reauthorization Act.  This Amendment restores desperately-needed protections to bankrupt student loan debtors at no cost to the public, with minimal impact on responsible lenders and educational institutions. It deserves the active support.

The provisions of Representative Danny Davis’s  (D-IL) Amendment differ in some respects from Senator Richard Durbin’s stand-alone SR-1561, currently in committee. Notably, it introduces a five year waiting period before a private student loan can be discharged for reasons other than undue hardship. It also excepts loans made by nonprofit educational institutions.

The provision exempting loans made by nonprofit educational institutions from discharge needs further scrutiny. Considering the recent scandals involving insider deals between private student lenders and colleges, both public and private, the potential for abuse seems large

Commercial lenders are certain to argue that changing the law will reduce loan availability and increase the costs of loans that are tendered. The historical statistics belie both assertions. The value of private student loans issued annually rose from 1.5 to 13 billion between 1997 and 2005, when they were still dischargeable in bankruptcy, and interest rates and fees did not drop following passage of the 2005 Act. If the law does curtail the most irresponsible lending, it will have done marginal students and the economy both a favor.