Congressman Steve Cohen

Representing the 9th District of Tennessee

Reps. Cohen, Davis and Swalwell Introduce Legislation to Restore Fairness in Student Lending

March 26, 2015
Press Release

[WASHINGTON, DC] – Congressmen Steve Cohen (TN-09), Danny Davis (IL-07) and Eric Swalwell (CA-15) today introduced legislation to restore fairness in student lending by treating privately issued student loans the same as other types of private debt in bankruptcy. Until 2005, this type of student loan debt was dischargeable in bankruptcy, but a change to the bankruptcy code made that year removed this consumer protection. Student loan debt now outstrips both auto loans and credit card debt as the largest form of non-mortgage consumer debt. According to Consumer Financial Protection Bureau (CFPB) estimates, outstanding student loan debt in the United States topped $1 trillion in 2011—including approximately $150 billion of private student loan debt.

“With student loan debt outpacing both auto loans and credit card debt as the largest form of non-mortgage consumer debt, Congress must take action to help reduce this burden on the American people,” said Congressman Cohen.  “People who seek higher education to better their futures should not be dissuaded from doing so by the threat of financial ruin.  The bankruptcy system should work as a safety net that allows people to get the education they want with the assurance that, should their finances come under strain by layoffs, accidents, or other unforeseen life events, they will be protected. Our bill will help achieve that goal, and I hope Congress considers it quickly.”

“The 2005 bankruptcy restrictions penalize borrowers for pursuing higher education, provide no incentive to private lenders to lend responsibly, and likely affect African American borrowers more negatively than other borrowers,” said Congressman Davis.  “I am proud to join with my colleagues to ensure that our statutes do not unintentionally burden particular groups of people.  Private education debt is no different than other consumer debt; it involves private profit and deserves no privileged treatment.  I will work actively with Senator Durbin and Congressman Cohen to protect student borrowers.”

“It is a moral crisis of our time: young people from across the country are sinking into the financial quicksand that is student loan debt. I know the feeling – I’m still carrying student debt myself,” said Congressman Swalwell. “Because student debt is treated differently than other forms of private consumer debt, today, Americans who come under hard financial times and declare bankruptcy will still be buried under a mountain of student loan debt with little hope of a fresh start. This is commonsense legislation that will protect student borrowers and encourage more Americans to follow their dreams of a college education.”

Before changes were made to the Bankruptcy Code in 2005, only government issued or guaranteed student loans were protected from discharge during bankruptcy. This protection has been in place since 1978 and was intended to safeguard federal investments in higher education.  Today’s bill would restore the bankruptcy law, as it pertains to private student loans, to the language that was in place before 2005, so that privately issued student loans will once again be dischargeable in bankruptcy.

For the past decade, private student loans have been the fastest growing and most profitable part of the student loan industry.  The interest rates and fees on private loans can be as onerous as credit cards. There are reports of private loans with interest rates of at least 15 percent, while even higher rates are not unheard of.  This can place a tremendous burden on student borrowers with private loans and unlike federal student loans, there is no government-imposed loan limit on private loans and no public regulation over the terms and cost of these loans.

Private loans involve only private profit and do not have the borrower protections that government loans have, including caps on interest rates, flexible repayment options, and limited cancellation rights.  There are very few types of debts that the bankruptcy law makes non-dischargeable, and these are usually made non-dischargeable for sound public policy reasons.  For example, the Bankruptcy Code makes non-dischargeable child support responsibilities, overdue taxes, and criminal fines.  Private student loan debt should not be on that list.

Following reports of unscrupulous practices by companies that the U.S. Department of Education contracts to collect on its public student debt, Congressman Cohen also called for greater scrutiny into their practices in another effort to protect students and student loan borrowers.