Private Student Loans and Bankruptcy

Picture this: Your client is an average person, working at a job and making his student loan payment every month on time. One day, his father dies. His father co-signed his private student loan many years ago. Soon after, the former student receives a notice from the bank: his loan is in default and they are accelerating payment.

In a panic, he calls you, his attorney, confused about why this is happening when he has paid his bills on time for many years.


Your responsible client is suffering from poorly-regulated private student loan law. Such auto-defaults are a result of conditions in the loan agreement that allow a lender to declare the loan in default and accelerate payment even when the loan is being paid as agreed.

Private lenders have the ability to act with near impunity, causing many problems for the millions of students paying their bills. In addition, these loans are exempt from discharge in bankruptcy. So while the client above suffered even as he repaid, others struggle through hardships, lost jobs, health problems and other life events, ruining their credit scores with no options for relief.

Why Discharge Matters

According to the Consumer Financial Protection Bureau (CFPB), student loan debt in the United States surpassed $1.2 trillion dollars in 2013. It is the second-largest source of debt that Americans have, after mortgages. Roughly 40 million Americans — one in six adults — have student loan debt, with an average balance of $30,000 each.

Of that $1.2 trillion dollars, it is estimated that $150 billion is private student loan debt. The CFPB also estimates that there are about 850,000 private student loans in default.

According to Forbes magazine, “that’s the highest delinquency rate among all forms of debt and the only one that’s been on the rise consistently since 2003.”

As college costs continue to increase, more students must borrow to pay for education. Many turn to private lenders for loans in addition to those offered by the government. Because private student loans are offered by private lenders and not backed by the government, there is little or no oversight regarding these loans, especially when it comes to consumers who have difficulty repaying.

Government-backed loans have a number of repayment and forgiveness options, including income-based repayment, graduated repayment, extended repayment, pay as you earn, teacher loan forgiveness and public service loan forgiveness. Private student loans do not provide the same options and because of the difficulty in discharging them in bankruptcy, there is little recourse for a consumer.

Student Loan Complaints

In the first three months of 2014 alone, there have been 1,115 complaints filed with the CFPB regarding the inability to pay private student loans. Those are just the complaints reported to the CFPB. It doesn’t include the consumers who have problems but are unaware of the CFPB and what they do.

Recently, the CFPB issued a report on complaints regarding private student loans. The report discusses a recent stance that the private lenders have taken to declare consumers that are current and up-to-date on their loans, in default when a co-signer dies or is somehow discharged of their liability.

Remedies

The best solution for the client above is to talk to a bankruptcy attorney, who can wade through his rights and options for continuing to repay his loan. Other attorneys can help by making sure clients do not sign loans with clauses regarding the death of a co-signer.

However, there is not much else private borrowers can do right now other than contact the CFPB to file a complaint.

That is why the time is long overdue for an indepth look at the murky laws surrounding private student loans. As more students realize they will not earn enough after college to repay loans, more will fall into default. Until there is some type of oversight or regulation on private student loans and/or some relief provided for in bankruptcy, the negative impact on the economy will increase.

Although some members of Congress have filed bills to amend these laws, there has not been much traction to address the issues by Congress as a whole.

- By Dennis Jay Sargent