CFPB asks Congress to consider changing bankruptcy rules for private student loans

WTF Private student loans 7.27.12

The Consumer Financial Protection Bureau has asked Congress to consider changing the bankruptcy code to allow the discharge of private student loan debts. 

A recent study by the bureau found that $8.1 billion of private student loans are in default as many recent graduates struggle to find gainful employment in one of the worst economic downturns since the Great Depression.

Confronted with a tough job market, graduates saddled with high-interest private student loan debts are turning to bankruptcy to restructure their finances. However, they’re unable to discharge their private student loan debts due to a 2005 law that blocked all student loans from bankruptcy protection unless the borrower can demonstrate “undue hardship” – a standard that the CFPB noted is a “heavy burden to prove”.

Read more: CFPB: Many students & parents unaware of private student loan pitfalls

“Federal student loans are owed to the government, and excluding them from bankruptcy discharge could be a method of defending the federal fiscal interest,”according the CFPB report. “There is little in the Congressional record surrounding the 2005 changes to the Bankruptcy Act regarding the rationale for treating private student loans similarly to federal student loans and differently from general consumer loans.”

The CFPB pointed out that several studies have failed to “find any systematic abuse of the bankruptcy code in seeking student loan discharges”, and the bureau was “unable to find strong evidence” that the 2005 bankruptcy code changes helped improve prices or consumer access to private student loans.

“If Congress concludes that the 2005 changes did not meet their overall policy goals, it would be prudent to consider modifying the code in light of the impact on young borrowers in challenging labor market conditions,” recommended the CFPB.

The bureau also proposed requiring school certification of private student loans to reduce over-borrowing and strengthening lender disclosure requirements to help students and their parents better understand the differences between federal and private student loans.

Private student loans make up about 15% of total outstanding student loan debt in the country.

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One Comment on “CFPB asks Congress to consider changing bankruptcy rules for private student loans

  1. Pingback: 5 key facts about private student loans | What The Folly?!

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