Congressmen Cohen, Davis and Swalwell Reintroduce the Private Student Loan Bankruptcy Fairness Act

WASHINGTON – Congressmen Steve Cohen (TN-9), Danny K. Davis (IL-7) and Eric Swalwell (CA-14) today reintroduced the Private Student Loan Bankruptcy Fairness Act, a measure to provide critical relief to those in severe financial distress because of overwhelming student loan debt.

Before 2005, private student loans issued by for-profit lenders were treated in bankruptcy like most other unsecured consumer debt, such as credit card debt.  The Private Student Loan Bankruptcy Fairness Act will ensure that privately issued student loans will once again be treated like other consumer debt and be dischargeable in bankruptcy.

Congressman Cohen made the following statement:

“When Congress changed the bankruptcy law, it did so without considering the harm that would be done by those who could not afford their private student loans but prohibited them from resorting to the unappealing but available remedy of bankruptcy. We have waited far too long for this commonsense solution to be enacted, and for fairness to return to the treatment of all consumer debt.”

Congressman Davis made the following statement:

“I am proud to join with Rep. Cohen to lead this bill to protect struggling Americans by restoring the treatment of private student loans like any other consumer debt. The hallmark of bankruptcy law is to give one a chance of meaningful relief.  Shockingly, a 2005 law removed this protection, benefiting for-profit lenders and preventing struggling borrowers from assistance.  This bill stops the unfair punishment of hard-working Americans and restores the fair treatment of private student loan borrowers.” 

Congressman Swalwell made the following statement:

“As someone with student loan debt, I know more must be done to relieve Americans of this financial burden. That’s why I’m proud to reintroduce the Private Student Loan Bankruptcy Fairness Act. Too often young people are forced to defer their dreams of starting a family, becoming a homeowner, or launching a new business. This bill will protect student borrowers, restore fairness in student lending, and incentivize more students to pursue a college education.”

Private student loans have much in common with credit cards and subprime mortgages.  For example, private student loans often have onerous interest rates with no caps and can include exorbitant fees and hidden charges.  In addition, many lenders have used aggressive marketing and high-pressure sales tactics to target particularly vulnerable people including young men and women without financial experience, and older Americans seeking to re-start their careers by pursuing higher education and training.

To make matters worse, private student loans lack the critical consumer protections that come with federal student loans. For instance, private lenders are not required to – and typically do not – provide any of the deferments, income-based repayment plans, cancellation rights, or loan forgiveness programs that are available to federal student loan borrowers.

When Congress changed the bankruptcy law, it did so without any substantive analysis so that student loans made by private, for-profit lenders became very difficult to discharge in bankruptcy.  Currently, Section 523(a)(8) of the Bankruptcy Code prohibits the discharge of private educational debt unless the debtor, in addition to meeting the already stringent requirements for personal bankruptcy, proves that repayment would impose an “undue hardship” on the debtor and the debtor’s dependents.  In practice, it’s hard for a debtor to ever successfully meet this standard.

Original cosponsors of the Private Student Loan Bankruptcy Fairness Act include Representatives Julia Brownley (CA-26) and Gwen Moore (WI-4).

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